Bull-Packard Bell pact signals PC/retail tumult

Electronic News, June 28, 1993 by Daniel Holden

CHATSWORTH, CALIF. -- France's Groupe Bull last week said it intends to buy 19.9 percent of U.S. mass merchant PC supplier Packard Bell as part of an alliance formed with Bull's subsidiary Zenith Data Systems (ZDS). The alliance, which involves manufacturing, sales channels and product development--aims to boost both companies' market share enough to survive the PC industry's current shakeout-threatening situation.

The ZDS/Packard Bell alliance was disclosed just as a third-tier PC maker, CompuAdd Computer, filed for Chapter 11 bankruptcy protection one day after it rolled out new PC and workstation products, but the turmoil is not limited to just lower echelon suppliers.

Apple Computer last week also struggled to refine its PC strategy (see story, page 3) and recent events in the tumultuous PC industry have also seen Dell Computer and delay introduction of its notebook computers (EN, June 21) and AST purchase the PC manufacturing operations of Tandy, which will stick to its retail trade (EN, May 31).

Under last week's agreement, ZDS will provide private-label versions of its Z-Note and Z-Sport notebook and subnotebook PCs to Packard Bell. Loss-plagued ZDS and Packard Bell will also jointly design and manufacture desktop PCs.

ZDS has desktop manufacturing facilities in St. Josephs, Mich. and France, while Packard Bell uses contract manufacturers in Taiwan for subassembly; its Chatsworth, Calif. facility does final assembly and testing. Packard Bell also has a 75,000-square-foot facility in Nijmegen, The Netherlands.

A ZDS spokesperson said the company was "looking at optimizing facilities usage" in light of the manufacturing alliance. He said Zenith would continue to use Far East contractors for its notebook and sub-notebook computers, even those to be supplied to Packard Bell. The St. Josephs facility is also ZDS' worldwide engineering center, and the spokesperson added ZDS recently called back workers to the St. Josephs plant to ramp up production to fulfill its Air Force $740-million Desktop-4 contract.

Talks between ZDS and Packard Bell began in February. The ZDS spokesperson confirmed under the agreement Bull can increase its stake in Packard Bell, but added that its has no plans to do so at this time. He would not state whether Bull has an exclusive option to increase its stake in Packard Bell, which last year withdrew an IPO after it garnered little interest. Bull will be represented on Packard Bell's board of directors.

Financial terms were not disclosed, although the French press reported that the sale price was about 200 million francs ($37 million), which Bull would not confirm.

Packard Bell increased its share of the U.S. PC market from 4.8 in 1991 to 5.6 percent in 1992, according to International Data Corp. Packard Bell expects revenues of $1.25 billion this year, following $938 million last year. ZDS, whose $900 million in sales last year were split about 50/50 between North America and Europe, held about 2.2 percent of the U.S. market both years, IDC said. ZDS run rate is currently at about 500,00 units, with Packard Bell at about one million.

By capitalizing on Packard Bell's mass merchandise channels, ZDS hopes to double its 8 percent to 10 percent market share in notebook PCs. Packard Bell has about 37 percent of the mass merchant channel market. Packard Bell may also enter direct-mail distribution through the ZDS label, according to industry analysts.

Industry observers believe price cutting in the PC industry has been most severe among companies like ZDS, which are tied to direct sales channels. IDC analyst Richard Zwetchkenbaum said direct response channels have been "ultracompetitive through the efforts of top-tier players forcing the reseller channel to stay competitive." ZDS' latest price cuts in May spanned its entire product line and included reductions from 3 percent to 23 percent.

Last week, CompuAdd, feeling the sting of tumbling prices, filed for Chapter 11 bankruptcy protection in an effort to solve real estate disputes triggered by its decision earlier this year to close its 110 retail outlets. The company plans to replace its entire line of desktop offerings later this year with a new 47-model lineup ranging from entry level systems to servers.

In the Chapter 11 filing CompuAdd, a privately held company with sales of $524 million last year, listed liabilities of $96.2 million and assets of $80.5 million. Total sales are expected to decline by as much as half as the company converts its retail operations from combined store and mail order sales to purely mail order.

Other vendors are also reevaluating their sales strategies. IBM earlier this month opened an experimental retail store in Aachen, Germany to sell the Ambra PC line, which is assembled by IBM's U.K-based Individual Computer Products International (ICPI) unit. (EN, June 21).

Meanwhile, Leading Edge Products, the U.S. subsidiary of Korea's Daewoo Telecom, last week said it would revamp its product mix of newly appointed president H. Michael Morand. Mr. Morand, who was most recently vice president of marketing for AST Research, is expected to oversee the rollout of new high-end servers and workstations, office automation products such as fax, and peripheral products.