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Doubts Cast on Packard Bell's Pact With Bull : Technology: The computer makers hope their strengths will cancel out each other's weaknesses. But they face an unforgiving market.

July 13, 1993|JILL BETTNER | TIMES STAFF WRITER

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.

Under the agreement, 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 down 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 Zenith notebooks, as well as 7,000 U. S. retailers who carry Packard Bell products.

"This is genuinely a win-win kind of deal," Beny Alagem, Packard Bell's president and chief executive, declared in announcing the pact.

Yet the pairing is also one of the oddest matchups to date in the struggling computer industry.

Moreover, some analysts say the alliance assures neither company's future.

"Desperate times in the PC industry are breeding strange bedfellows," said Roger Lanctot, vice president of the Personal Technology Research consulting firm in Waltham, Mass.

He added that both Packard Bell and Groupe Bull are "a mess."

Packard Bell, Bull and Zenith have 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.

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 also needs to boost its presence in the growing notebook market.

Last year, laptops accounted for only about 4% of the company's sales.

Groupe Bull makes far more sophisticated mainframes and microcomputers for businesses.

Zenith has also primarily targeted its desktop PCs and notebook computers at corporate and government accounts as well as schools.

Groupe Bull has lost nearly $2.8 billion since 1990.

Under pressure by the French government to cut costs and prepare for privatization, it announced last week that it was shedding 6,500 jobs.

Based in Buffalo Grove, Ill., Zenith had sales of about $900 million last year.

The company has not turned a profit for the past 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 new desktop models, a new notebook and a subnotebook that weighs less than four pounds, said Cliff Jenks, Zenith's executive vice president of North American sales and marketing.

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's vice president of marketing, Mal Ransom, declined to discuss Packard Bell's financial condition, except to say that it is now profitable.

The company expects 1993 sales to climb 30%, to $1.2 billion.

And unlike most computer companies, Packard Bell has been hiring--400 employees since January--expanding its work force to 1,800.

Packard Bell has also 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 various reasons, including stores' liberal refund policies.

(Less than 2% were returned due to quality problems, the company 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.

Moreover, analysts say Packard Bell does not have the technical expertise to match wits with industry giants that are jumping into the mass-merchant channel Packard Bell pioneered.

That market is the healthiest in the industry, likely to grow 9% to $1.7 billion by the end of this year, according to International Data Corp., a Framingham, Mass., research firm.

Packard Bell has about a 30% share.

But IBM, Compaq and other giants with far deeper pockets than Packard Bell have stepped up their mass-merchandising efforts.

Hewlett Packard, Digital Equipment Corp. and NCR Corp. are putting their PCs in retail stores.

Said Dennis Allen, editor of Byte magazine: "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."

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