NEC to Merge Its PC Unit With Packard Bell

NEC Corp. gave a major financial boost to Packard Bell Electronics Inc. on Tuesday, agreeing to merge its personal computer division with the troubled Sacramento-based PC maker in a deal that creates an $8 billion-a-year technology powerhouse.

The new company, Packard Bell NEC, will be based in Sacramento and headed by Beny Alagem, Packard Bell’s current chairman and chief executive. When the deal is finalized, the combined company will market three major brands--Packard Bell, NEC and Zenith Data Systems--and control 15.1% of the PC market in the United States. Officials expect the company, which will not include NEC’s Japanese and Chinese operations, to go public in its first two years.

Packard Bell, which leads the PC market in price but has struggled with profitability by relying on razor-thin margins, has been fighting to survive in an increasingly cutthroat PC market. Last year, NEC acquired a 19.9% share of the ailing Packard Bell, and the two firms have already started joint procurement and sales.

Analysts said the deal will help bolster Packard Bell’s image on Wall Street by staving off a financial crisis, and burnish its reputation on Main Street by aligning the discount computer maker with the well-respected NEC.

“For a while, people perceived Packard Bell as bottom-of-the-line in terms of price and quality,” said Jerry Fleming, a technology analyst with Hancock Institutional Equity in San Francisco. “This deal makes them a credible entry.”

The deal is not expected to lead to major changes in the competitive landscape of the PC industry, analysts said. The companies could find some synergies and economies of scale to boost their combined market share a bit, but since their core businesses do not overlap much, the impact--if any--is expected to be small.

“I think it will be business as usual,” said Kurt King, vice president of Montgomery Securities in San Francisco. “What Packard Bell brings to the party from the consumer market is not transferable to the corporate market NEC serves, and vice versa for NEC.”

Packard Bell executives said the marriage makes strategic sense because it brings together NEC’s technological edge in telecommunications, computers and electronics; Packard’s large market share in the U.S.; and a strong position in the government and education market served by Zenith Data Systems, which Packard purchased from Groupe Bull of France in April. (NEC also owns 17% of Groupe Bull, France’s largest computer firm.)

“This gives us the opportunity to serve higher-margin markets,” said Roger Nordby, Packard Bell’s chief operating officer. “It’s no secret that the margins on the PC business are low, and now that we’ll be able to penetrate into some other markets it will definitely benefit our bottom line.”

But analysts said they believe that immediate financial considerations drove the deal: Packard Bell is saddled with debt, and had to abort several previous moves to go public.

“This deal is telling us that Packard Bell needs to work on its financial situation,” Garland said. “They went to a big brother and said, ‘We need some cash.’ ”

That has been clear for almost a year. Last July, NEC invested $170 million in the cash-strapped company. In November, chip maker Intel Corp. announced that one of its five largest customers--widely believed to be Packard Bell--had fallen behind on paying an outstanding bill of $470 million.

Chris Shimizu, an NEC spokesman, said the merger will allow the Japanese electronics giant to lower its production costs and set “de facto” industry standards.

“We would like to try to take a leading position, particularly in multimedia,” he said.

The combined firm will have 8,000 employees, including 1,000 from NEC’s Boxborough, Mass., operation. NEC’s sales in Asia will still be operated out of Japan, with NEC-brand products supplied by Packard Bell NEC.

Last year, Packard Bell sold 4 million PCs worldwide. NEC sold 3 million in Japan--more than half the PCs purchased there--but shipped only 600,000 overseas.

“Packard Bell NEC is poised for phenomenal growth over the next five years--so much so that we anticipate a public offering of Packard Bell NEC stock within two years to ensure the capital is available to support that growth,” Alagem said.

Times staff writer Evelyn Iritani reported from Tokyo and special correspondent Karen Kaplan reported from Los Angeles.