Compaq’s Failure: Here’s What Really Happened

When you think of the personal computer names that dominate the landscape today, you’re almost guaranteed to think of Microsoft, HP, Apple, and Dell. Had someone asked the same question a few years back, Apple likely wouldn’t have been on the list, and in its place, it would have been brands like Gateway and Compaq.

Today, Compaq is an industry name long forgotten, but when it was founded in 1982, it would soon become the biggest name in personal computing. Looking back on Compaq and its failures reminds us of where the computing industry has been and where we are today. 

So why did Compaq fail? There isn’t one answer or one misstep, but a culmination of many decisions and a few mergers went wrong. 

Why Compaq Mattered

While Compaq is not a name most people remember today, this computing company mattered greatly in the 1980s and 1990s.

Compaq was the youngest company ever to be listed on the Fortune 500 and, only five years after its founding, reached over $1 billion in revenue by 1987. Even with this success, Compaq mattered because it was one of the first companies to threaten IBM’s dominant hold on the computing market seriously. 

When you bought a Compaq PC, you were sure you were getting a sturdy, highly regarded machine that would last for years. Unlike IBM and its clones, which were heavily focused on price, Compaq focused on features like better graphics that would strongly appeal to new personal computer users.

In the mid-1990s, as Compaq was already flying high, they would become one of the first computer manufacturers to market a personal computer for less than $1,000. This was a watershed moment for the company. 

The History of Compaq: What to Know

It’s 1982, and three men, Rod Canion, Jim Harris, and Bill Murto, left their jobs at Texas-based Texas Instruments.

After losing faith in their management, each man invested $1,000 to form a computer company, Gateway, which was quickly changed to Compaq. Compaq pitched to many venture capitalists as a startup with their vision of a new computing company and raised $25 million to break into the industry. 

The First Computer

The Compaq Portable’s first product was released in 1983 for $2,995. Best known as one of the predecessors of today’s modern laptops, it was a breakthrough as it could run all of the same software as an IBM PC. The Portable sold 53,000 units in its first year and generated $111 million in revenue for Compaq. 

As 1984 rolled around, Compaq released its first desktop, the Compaq Deskpro. This 16-bit computer ran on an Intel processor much faster than IBM PCs. Like the Portable, Deskpro also ran all IBM software, a significant feather in Compaq’s cap.

Compaq continued to release more computers in the 1980s and would be one of the first companies to start running an operating system from a little-known company, Microsoft. 

Success and Acquisitions 

The 1990s were a little more tumultuous for Compaq as its founders started breaking away from the company, leading to its move in a different direction. Instead of just manufacturing computers, Compaq wanted to acquire new companies and find a more diverse set of revenue streams. 

As Eckhard Pfeiffer took over as CEO, Compaq turned its focus on the retail market with the Compaq Presario, the first sub-$1,000 personal computer. Its success would help Compaq, once a minor player in the industry, overtake Apple and IBM as the top PC manufacturers. 

However, even as Compaq saw huge wins, its desire to generate more revenue would ultimately lead to its downfall. The long ride to the computer graveyard began with Compaq acquiring Tandem Computers for $3 billion in 1997 and Digital Equipment Corporation (DEC) in 1998 for $9.6 billion. 

Signs of Trouble

The DEC acquisition almost immediately caused trouble for Compaq, as these two companies were not a match made in heaven. DEC focused heavily on manufacturing computer chips, a business Compaq had no interest in continuing. Compaq was Intel-based, while DEC relied on a UNIX system for its machines. 

There’s a strong argument to be made that Compaq’s downfall began with this merger, as it resulted in layoffs. At the same time, efforts were made to remove Pfeiffer as CEO and repair relationships that Compaq had seen damaged due to this acquisition. More importantly, what hurt Compaq the most, was that it couldn’t stay on its timeline for integrating DEC’s operations. The hope was that they were building a 22,000-person global service operation with multiple revenue streams by sticking with their timeline. 

In addition to the acquisition trouble, Compaq’s newest competitor, Dell, was also putting pressure on the low-end PC market, where Compaq had found huge success. Compaq had hoped to become a systems company like IBM or HP with its DEC acquisition, but it found itself with no clear vision and increasing competition. 

Compaq also failed to capitalize on the huge purchase increase in 1999, as companies feared their old equipment would suffer from Y2K bugs. Dell, Gateway, and HP all capitalized and increased sales, while Compaq failed to react and suffered massive losses on revenue and unsold equipment it had to liquidate. 

Why Compaq Failed

After years of success, Compaq’s signs of struggle were loud and clear. Leadership changes at the top didn’t help post-DEC merger, and when the dot-com bust finally happened, Compaq suffered in a way that would be hard to recover from.

Dot-coms bought up huge amounts of equipment to power their growth, and they were a solid revenue stream for many years. When these companies started to fail en masse, Compaq found itself without many big corporate customers. 

As this video from Asianometry points out, it shows why Compaq had such a first-mover advantage. At least, that’s what we’d want to believe, but as the video shows, at least initially, it also shows why Compaq’s business practices like purchasing Tandem and DEC would end up being the first steps toward the company’s fall.

Direct to Consumer

With the purchase of DEC and Tandem, Compaq finally believed it was ready to match Dell’s moves and sell directly to consumers. What Compaq saw was that with Dell, it could potentially lower prices and offer better customer service by going directly to consumers.

Unfortunately for Compaq, personnel love and an inability to compete with Dell on margins were a huge issue. By September 1999, Dell would overtake Compaq as the leading PC seller in the country.

As the video points out, Compaq couldn’t match Dell’s momentum and added multiple personnel changes at the company’s top, which was the beginning of the end.

Intel

Surprisingly, one of the main reasons Compaq first succeeded was also one of the main reasons it started to decline. Intel had been a fantastic partner in Compaq’s early years. Still, when Intel began to produce its chipsets and motherboards, it stabilized the PC playing field, benefiting Compaq’s biggest rivals. 

Compaq’s rivals, like Dell, could outsource their CPU engineering to Intel, put the resulting chips into their computer hardware, and beat Compaq’s pricing.

Customers didn’t know the difference, and marketing spoke volumes as competitors worked to market their machines as good as or better than Compaq’s and at lower prices. It was a risky strategy that worked better than Compaq rivals like Dell could have ever hoped for. 

Hewlett Packard

Between pressure from Intel and the dot-com bubble burst, Compaq was treading water and needed a lifejacket. This life-saving move came from an unlikely partner in the form of Hewlett Packard, which announced a 24.2 billion dollar acquisition of Compaq in 2002. The combined revenue of the two companies would be just shy of IBM’s, immediately making Compaq a huge global player. 

Compaq shareholders were eager to pass the deal and get a premium on their shareholdings, continuously dipping in value as Compaq faltered in the marketplace. On the other hand, HP shareholders were more skeptical, and the proxy battle against the deal was very public. 

Ultimately, the deal would pass but at a high price. Instead of a more even share of both companies having a large ownership voice, HP proposed and accepted a swap stock, which resulted in their being the party with controlling interest. On top of that, more than 15,000 employees would be laid off during the merger process, which understandably had Wall Street very concerned about prospects. 

The friction between HP and Compaq’s leadership was immediate. As they tried to figure out how to paddle in the same direction, Dell took advantage and gained market share. As a reaction, HP tried to integrate Compaq products under the HP name and shift Compaq to the budget segment.

Ultimately, the Compaq name would be dropped in favor of a new HP logo, and by 2013, it was gone for good. 

Historical Significance of Compaq

Compaq played a major role in introducing the low-cost personal computer market that continues today. Many of you reading this may have family that owned a Compaq computer during the 1990s or even own one yourself.

A competitor like Gateway or Dell would have eventually acted on their efforts to market a low-cost PC, but Compaq was first, and for that, they deserve plenty of credit. Perhaps most importantly, Compaq played a significant role in disrupting IBM’s dominance in the computer market, which shoved the door open for giants like HP and Dell, who control more than 50% of the PC market in 2024.

The image featured at the top of this post is ©Andreas Merchel/Shutterstock.com.