High-Tech Alliance Raises Some Doubts : Computers: Analysts wonder if Packard Bell’s new French ‘marriage’ will solve companies’ problems.
When Packard Bell Electronics Inc. in Chatsworth said it had found an equity partner in France’s Groupe Bull last month, the two troubled computer companies trumpeted their “strategic alliance” as a move that would strengthen them both.
But analysts are calling the match between these high-tech newlyweds a marriage of desperation. They predict it probably won’t be long and happy.
“Desperate times in the PC industry are breeding strange bedfellows,” said Roger Lanctot, vice president of the consulting firm Personal Technology Research in Waltham, Mass. He said both Packard Bell and Groupe Bull are “a mess.”
On the surface, at least, the alliance makes sense. Groupe Bull will acquire 19.9% of Packard Bell and a seat on Packard Bell’s board. The partners will also jointly design and manufacture desktop personal computers.
The venture gives PC marketer Packard Bell much-needed cash to pay debt and the ability to market notebook-size computers developed by Groupe Bull’s U.S. subsidiary, Zenith Data Systems, a pioneer in notebook-computer technology.
Groupe Bull, with $6 billion in annual sales, gets access to Packard Bell’s lower-cost manufacturing sources for the Zenith notebooks and to 7,000 U.S. retailers who carry Packard Bell products.
“This is genuinely a win-win kind of deal,” said Beny Alagem, Packard Bell’s president and chief executive.
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Yet the pairing is also one of the oddest match-ups to date in the computer industry. Packard Bell, Groupe Bull and Zenith have all focused on different types of products sold through different marketing channels. And all three have stumbled as they faced new competition from more nimble or better-financed rivals.
The pact “is a good thing, but it’s a sideshow to the need to expand their sales through understanding their customers better,” said Sam Whitmore, editorial director of PC Week, a trade journal. “Zenith needs more help than Packard Bell, probably.”
Dan Ness, an analyst at Computer Intelligence Corp., a La Jolla research firm, said the alliance can help both Groupe Bull and Packard Bell “stay in this business, but it’s really just the start. There are a lot of other things both companies need to do.”
Packard Bell, with sales of about $930 million last year, is one of the largest U.S. suppliers of personal computers, sold through stores such as Sears Roebuck & Co., Montgomery Ward and Circuit City. It specializes in low-cost, mass-market products.
Financial terms of the new alliance were not disclosed. Analysts estimate that Groupe Bull will pay about $50 million for its Packard Bell stake.
The cash will help highly leveraged Packard Bell clean up its balance sheet. The company had hoped to raise $70 million in an initial public stock offering last year, but investor concern over its finances helped derail that plan--although Packard Bell blamed its failure to sell stock on poor market conditions for IPOs. In 1991, Packard Bell had about $93 million of debt and would have lost $798,000 had it been a public company, according to documents it filed with the Securities and Exchange Commission.
Packard Bell’s vice president of marketing, Mal Ransom, declined to discuss the company’s financial condition, except to say it is now profitable. The company expects 1993 sales to climb 30% to $1.2 billion.
Groupe Bull makes far more sophisticated mainframe computers and microcomputers for businesses. Zenith has also primarily targeted its desktop PCs and notebook computers at corporate and government accounts, as well as at schools.
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Groupe Bull has lost nearly $2.8 billion since 1990. Under pressure from the French government to cut costs and prepare for privatization, it announced last week that it was shedding 6,500 jobs.
Zenith, based in Buffalo Grove, Ill., had sales last year of about $900 million. The company has not turned a profit in the last three years, according to several analysts, and has had trouble competing with lower-cost manufacturers such as International Business Machines Corp., Apple Computer Inc. and Compaq Computer Corp.
Since January, Zenith has laid off 400 employees, or about 17% of its work force.
Groupe Bull has invested to expand Zenith’s product line since acquiring it in 1991, including adding 40 desktop computers, a notebook and a sub-notebook weighing less than four pounds, said Cliff Jenks, Zenith’s executive vice president of North American sales and marketing.
Packard Bell needs to boost its presence in the growing notebook-computer market.
Last year, the popular laptops accounted for only about 4% of the company’s sales.
Jenks said Zenith’s unit sales are up more than 60% from a year ago. In 1992, Zenith sold about 500,000 computers.
Packard Bell sells a lot of computers too, and has made progress on a major problem: a high rate of returned merchandise. Two years ago, according to SEC documents, about 17% of monthly shipments came back to the factory for all reasons, including stores’ liberal refund policies. (Less than 2% were because of quality problems, Packard Bell said.) Now monthly returns are sometimes 6% of shipments or less. But to cut them, Packard Bell has had to give its 7,000 retailers new incentives, including rebates.
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Moreover, analysts say Packard Bell lacks the technical expertise to beat the industry giants now jumping into the mass-merchant channel it pioneered. That market is the industry’s healthiest, likely to grow 9% to $1.7 billion by year-end, said International Data Corp., a Framingham, Mass., research firm. Packard Bell has about a 30% share.
IBM, Compaq and other computer giants with far deeper pockets than Packard Bell have stepped up their efforts in the mass-merchant market. Hewlett Packard, Digital Equipment Corp. and NCR Corp. are all putting their PCs in retail stores.
Dennis Allen, editor of Byte magazine, said: “The industry is competing a lot more on performance. How well is Packard Bell going to play in that arena? Technology hasn’t been the strength they’ve demonstrated best. Their strength has been price.”
