Compaq to Phase Out Chips Line

NEW YORK — Compaq Computer Corp. said Monday it plans to phase out its own line of computer chips in favor of microprocessors made by No. 1 chip maker Intel Corp. as well as deepen cost cuts, in moves to speed its shift from a hardware company to a business services company.

Compaq, which lost its lead in the personal computer market to Dell Computer Corp. this year, said it agreed to use Intel’s Itanium chips in its high-powered computers, also known as servers, in a transition to be completed by 2004.

Compaq will transfer to Intel hundreds of employees and other resources related to its own chip technology, known as Alpha. In the mid-1990s, Alpha was considered a pioneering microprocessor, developed by Compaq’s Digital Equipment business in a largely ineffective challenge to Intel.

By adopting a standard underlying technology in lieu of its own proprietary chips, Compaq is betting that it can differentiate itself in the eyes of its customers with its services and software.

“It puts more of a burden on Compaq toward being a complete systems company and building up a lot of their services and other things to help differentiate them,” said J.P. Morgan Chase analyst Walter Winnitzki.

Also, in a memo to staff dated June 12, Compaq Chairman Michael Capellas said the company would aim to cut $200 million in costs every quarter starting in the first quarter, totaling $800 million for the year. In its earnings report for the first quarter that ended March 31, Compaq said it planned to reduce structural costs $500 million to $600 million annually.

“Reducing structural costs is absolutely necessary in order for us to price competitively and improve profitability,” the memo said.

Compaq has been struggling to regain its financial footing amid a computer price war with other PC makers.

The memo spelled out an approach that includes a greater focus on services and software, not unlike computer giant IBM Corp.

IBM has said it has sidestepped the brunt of the technology slowdown in part because of the strength of its large services business and its exit from consumer retail sales of PCs over a year ago.

In the memo, Compaq indicated it has allocated $500 million to acquire services companies to expand that part of its business.

Shares in Compaq rose 40 cents to $13.90 on the New York Stock Exchange, while Intel rose $1.07 to $28.58 on Nasdaq.