Buoyed by a pending partnership with Samsung Electronics Co. in Korea, the chairman of AST Research Inc. on Wednesday predicted that the $378-million deal would help strengthen his company’s long-term bid to rival IBM and Compaq.
“It has always been our goal to be among the top three computer companies,” said Safi Qureshey in an interview upon returning from Seoul, where the agreement was announced earlier this week. “There is a lot we can leverage between the two companies, and there’s not a lot of duplication.”
The agreement, which would give Samsung a 40% stake in AST, would provide the struggling Orange County computer maker with $250 million in badly needed cash once the deal is completed. Samsung would spend an additional $128 million buying stock from AST’s current shareholders.
Within a year, Qureshey said, AST and Samsung designers will work together on developing new products, such as personal computers that can run programs combining text, music and video-quality graphics and notebook PCs with screens thinner than magazines. “They’re great at manufacturing, and that’s something we’ll definitely want to take advantage of,” Qureshey said.
Samsung will probably begin selling AST’s lightweight notebook computers and more powerful desktop machines for office use, he said, though details for joint marketing agreements have not been worked out.
Under the agreement, Samsung will be given one less than a majority of the seats on the AST board of directors, which will probably mean adding six new seats to the current seven-member board, AST President Jim Schraith said.
Close cooperation will be mandatory if Samsung hopes to make full use of its new U.S. partner, observers and analysts said.
“It’s more than just a casual, ‘Let’s be on the board’ move by Samsung, but now they have to show how interested they are to make it work,” said Jim Poyner, an analyst at Oppenheimer & Co., a New York investment firm.
The Korean electronics conglomerate, with $14 billion in sales last year and 60,000 employees worldwide, already makes computers sold in America under the AT&T; and IDN brand names but has had little success marketing its own machines except in Korea.
Samsung’s other products include advanced memory chips, color PC monitors, VCRs and CD players, which should complement AST’s strengths in computer design and distribution. Irvine-based AST is the world’s sixth-largest computer maker, and has strong sales in Asia, with plants in Hong Kong, Taiwan and China.
“There are strategic possibilities they might look at,” said Todd Bakar, a senior analyst at Hambrecht & Quist Inc., a San Francisco investment bank. But from AST’s point of view, he said the basis of the deal is that “AST needs the cash.”
AST and Samsung executives spent about two months crafting the partnership agreement in meetings in Irvine, Seoul and San Jose, the site of Samsung’s Information Systems division. Michael Yang, a Samsung strategic manager who took part in the negotiations, said Samsung decided against buying a majority stake in AST to avoid disruption for the company’s 6,500 workers worldwide.
“We thought 100% would be very risky, because any time you have a switch of ownership, that creates a lot of uncertainty among the employees,” Yang said. “That was the primary reason we wanted to form a partnership.”
The deal was modeled, in part, on a similar deal by Hyundai Electronics Industries Co. in February, 1994, in which Hyundai spent $150 million in cash to buy 40% of Maxtor Corp., a San Jose disk drive company, Yang said.
To purchase 40.25% of AST’s stock, Samsung will buy 12.07 million newly issued shares for $250 million, and will spend an additional $128 million to buy an additional 5.82 million shares from shareholders at $22 per share. Finally, Samsung will guarantee $75 million of debt that AST owes to Tandy Corp., in Fort Worth, Tex., bringing the total value of the deal to AST to more than $450 million. Samsung has agreed it will not raise its stake above 49.9% for at least four years.
Yang said Samsung would take an “active role” in AST’s management through its seats on the company’s board, but added that his company has confidence in AST’s current management.
To make the partnership work, AST’s top management may have to adopt a more informal style, said Mike Morand, a former AST vice president of marketing. Morand is now chief executive of Leading Edge, a computer manufacturer in Westborough, Mass., that is a wholly owned subsidiary of another South Korean conglomerate, the Daewoo Group.
“As business partners, the Korean companies tend to place a high emphasis on being straightforward,” Morand said. “You have a lot of verbal and nonverbal communication, and you feel like there’s a lot less paperwork that you need to follow up on.
“They eschew a lot of the formalities that Americans are used to,” he said.
If Samsung and AST begin joint distribution of each other’s computers, their combined sales would rival those of Japan’s NEC, the world’s fifth-largest PC maker, according to figures from Dataquest, a market research firm in San Jose.
William Gurley, an analyst at CS First Boston, an investment bank in New York, said that despite the strategic appeal of the alliance, AST managers may still have to lobby Samsung, which already is AST’s seventh-largest vendor, to obtain savings on components.
“I’m less willing to get excited about the pricing advantages AST is supposedly going to get,” Gurley said. “The component business is very competitive and there’s a divisional manager in Korea somewhere who is going to be monitored on his bottom line. He’s not going to be too eager to pass along savings to this other entity.
“With a lot of these things it’s easy to say something is going to happen, but it’s another that it actually happens,” Gurley said.
AST co-founder Al Wong, who left AST several years ago, said the deal with Samsung should be beneficial for the company.
“It looks like a good business decision,” Wong said. “I didn’t like everything that happened since I left, but the deal’s not a bad one. It should help them out through hard times, since Samsung is a substantial company.”