NEC, Packard Bell to merge PC operations outside Japan

Electronic News, June 10, 1996 by Elaine Chen

Sacramento, Calif.-- Packard Bell last week agreed to combine forces with NEC's PC division outside Japan, creating an $8 billion company called Packard Bell NEC. While details of the transaction are still being finalized, NEC is slated to provide undisclosed assets valued at approximately $300 million to the venture.

Analysts suggest the move should bolster the cash position of Packard Bell, which has staked out a large chunk of the margin-pressed desktop PC retail market in the U.S. with a low-priced product line. The deal also offers NEC, traditionally a leading desktop player in Japan, the chance to make a dent in the U.S. desktop PC market, where it has lagged, despite strength here in notebooks and other products.

Ties between the newly-formed PC business and NEC's component operations, which picked up after NEC took a stake in Packard Bell last year, are likely to intensify, many analysts add.

Under the terms of the memorandum of understanding signed by the parties last week, NEC will exchange assets valued at approximately $300 million for non-voting stock in Packard Bell. Although the number of shares has yet to be determined, Packard Bell stated NEC's total holdings will range from 35 to 40 percent. NEC had acquired 19.9 percent of Packard Bell last year for an estimated $170 million. (EN, July 10, 1995). NEC's peripherals business, including its strong monitor line in the U.S., will remain separate from the new company, as will NEC's PC operations in Japan, which accounts for the majority of its PC sales.

In a press conference, Packard Bell CEO Beny Alagem estimated the new company's first-year revenues would total $8 billion and noted that last year, NEC, Packard Bell and Packard Bell subsidiary Zenith Data Systems had 11.4 percent of the worldwide and 15.2 percent of the U.S. PC markets. He added that the merger "allows our dream to come true--to become the biggest computer company in the world." Mr. Alagem indicated the privately-held company may go public in another two years.

Analysts consider the merger to be a wise move for Packard Bell, which reportedly has been plagued with cash problems. As In-Stat analyst Mark Kirsten observed, "I'm not sure whether Packard Bell had a choice." Packard Bell's rapid growth and high market share came at the expense of its margins, with its low prices fostering cash-flow difficulties in addition to sales, many analysts claim. Many sources have speculated that Packard Bell was the unnamed beneficiary of a $470 million receivables restructuring Intel announced last year. (EN, Dec. 4, 1995).

The infusion from NEC has come on what appear to be very favorable terms for Mr. Alagem, who will remain at the helm of the new company and will retain substantial control. Under the terms of the proposed merger agreement, Packard Bell founding shareholders will elect five members of the new company's nine-person board of directors, with NEC appointing only two members and 19.9 percent stakeholder Groupe Bull selecting the remaining two. Some analysts also indicated NEC's estimated share of the company seemed small in relation to the size of its investment.

However, sources agreed the match offers many good opportunities for NEC, with analysts like Harrison Rose, who is based in Sunnyvale, Calif., terming the merger a "terrific move." Packard Bell has a relatively diverse product line but little presence in the laptop market, a good fit with NEC's strength in the notebook area. Mark Kirsten also noted that "Packard Bell does have something NEC has been lacking--the market penetration."

NEC clearly hopes to take good advantage of Packard Bell's U.S. channel strengths. Dr. H. Kaneko, NEC's president, stated that he believed the merger "will greatly expand our brand presence and long-term business opportunities." Industry sources agree that the merger provides NEC with expanded access to the U.S. market. "They've always done well outside of North America and this gives them a better shot at creating a bigger presence in the North American market," said George J. Robillard, Fujitsu's VP of memory products.

NEC also stands to benefit as a supplier to the new company, another plus. Prior to last year's alliance, NEC stated it sold approximately $40 million of memory chips and CD-ROMs to Packard Bell annually; over the past year, volume grew to $200 million. An even larger relationship will prove an important benefit for NEC, which like all other semi manufacturers has been hit with falling prices and is currently said to have a surplus. "It's certainly a convenient arrangement for a company that makes boxes and a company that makes all kinds of things, including chips," said a spokesperson for the Semiconductor Industries Association.

Yet analysts caution that the venture still contains substantial risks. "We've yet to see one of these PC mergers work out," warned Dean McCarron, a principal with Mercury Research. Combining a privately-held company with a large conglomerate could lead to culture clashes, with analysts like Norman Bogen of In-Stat citing Alagem's at-times "disorganized" management style. Packard Bell has also faced quality problems in the past, with competitor Compaq alleging use of used components. "Potentially, it's a problem," stated Mike McGuire, Mobile Analyst for DataQuest, noting that competitors will be eager to exploit the quality issue with customers regardless of whether it has been resolved.