Compaq Refocuses Private Plays as Public Portfolio Struggles

After watching his company?s equity portfolio tumble in the the public markets, Compaq Computer Corp. Chairman Michael Capellas announced late in September that the company would scale back its future investments. Rather than simply enacting an across-to-board withdrawal, however, the computer giant has followed up its proclamation by shifting away from complementary high-tech technologies and toward industry-specific plays that pair private equity investments with purchase agreements.

Most recently, the company said it would dedicate $100 million to early-stage life science companies, or genomics and bioinformatics firms whose massive information and data storage needs could be sated by Compaq technologies.

For example, Compaq?s first direct investment in the life sciences area included a $70 million agreement whereby venture capital recipient GeneProd would purchase Compaq systems over the next three to four years.

Not only will Compaq carve out a niche in the life sciences market through its directed investment program, but it also will secure additional returns off invested funds, said Ty Rabe, director of Compaq?s high performance technology computing solutions.

Backing Up The System

Enterprise computing ? which, in Compaq parlance, is the IT infrastructure developed for storage and networking needs ? accounted for 34% of the company?s $11.2 billion third quarter revenue. The $3.8 billion represented an increase of 19% year-over-year. Top line revenue growth was fueled by increased shipments of the AlphaServer GS series, the same series Compaq is offering to its life science portfolio. Business critical server revenue for the third quarter increased 5% over the year-ago period to $813 million. The company shipped 400 of the AlphaSystem servers during the quarter.

The company?s consumer group, on the other hand, grew faster than its enterprise solutions counterpart, with revenue of $2.1 billion for the quarter, a year-over-year increase of 45%. That increase, however, was largely driven by the type of add-on services like printers and software packages that Compaq has pursued through its venture activities with equity investments and partnership agreements. And it is in those previous ventures ? such as Red Hat Software Inc. and NetZero Inc. ? that Compaq has suffered its greatest public market losses. Red Hat opened trading today at $12.46 per share while Netzero had dipped into penny stock territory by opening at $1.78 per share.

Indeed, by the close of the third quarter, Compaq?s public equity portfolio had shrunk to $2.4 billion from the $6.6 billion held at the end of last year.

Not Breaking with Tradition

Still, Compaq will continue to carve out a name for itself in high-growth industry sectors with huge information technology needs ? pumping equity into start-ups to fuel its own top-line growth in the enterprise computing division and securing adequate financial returns on investments, Rabe said. The life sciences investment program is sponsored by the company?s business critical servers division.

Not only will Compaq continue to make direct investments in the life sciences sector, but it will also make investments in biotech and genomics private equity funds. Already it has secured a partnership with Cambridge-Mass.-based Applied Genomic Technology Capital Fund. It is a limited partner in the vehicle, and is also the exclusive information technology provider to the fund?s portfolio company. It has also secured the right to make direct investments alongside the fund.

According to Rabe, the company is actively considering further investments in the field, and while he declined to name any particular firm, said the $100 million could be invested within six months. He added that the future could witness similar extended-type programs.