AST STEPS OUT OF THE SHADOWS
For more than a decade, AST has been the unassuming plodder of the personal-computer business--a long-distance runner that quietly pressed on no matter how difficult the terrain. Year after year, the clonemaker has been consistently profitable, churning out copies of IBM PCs at discount prices. Although it never achieved the name recognition of Compaq Computer Corp. or the glitzy aura of Apple Computer Inc., it never suffered the public crises that have forced those companies periodically to reinvent themselves. During the protracted PC price wars, AST Research Inc. has gone about its business, slashing prices, squeezing out overhead, and avoiding upheaval. It even managed to move out most of its old management and bring in industry veterans without creating a stir.
Now it won't be so easy for the company, based in Irvine, Calif., to work quietly in the shadows. Suddenly, AST is one of the big guys, thanks to the completion last month of a deal to buy much of Tandy Corp.'s computer-making business. The $175 million acquisition overnight doubled AST's plant capacity and should boost annual sales by half, to more than $2 billion. The move catapults AST to the No.4 spot in the PC business, leapfrogging Packard Bell, Dell Computer, and Gateway 2000. Based on 1992 shipments for Tandy and AST, the combined company is behind only Apple, IBM, and Compaq, says market researcher International Data Corp.
AIRLIFTS. For AST, it was an uncharacteristically bold move, but one that was necessary for the company's survival, says Safi U. Qureshey, AST's co-founder, president, and CEO. "With all the consolidation in the industry, the strong are getting stronger," he reasons. "This gives us economies of scale that we need in order to compete with the big guys." Adds Lise J. Buyer, a technology analyst at mutual-fund manager T. Rowe Price in Baltimore: "It's a stunning deal that will give AST the visibility it's lacked in the marketplace and the clout it needs to keep its costs down."
Qureshey's challenge now is to insure that the Tandy acquisition doesn't give AST indigestion. It's no small task. He must integrate Tandy's troubled computer business, which lost more than $150 million in the past two years, into AST's lean and profitable operations. And he must reconcile two dramatically different cultures, melding AST's traditional focus on the high-end business market with Tandy's reputation as a supplier to homes and small businesses.
With PC profit margins as thin as eggshells, AST has little room for error. And the Tandy acquisition already has hit its bottom line: AST posted a $125 million one-time charge against earnings last quarter to handle restructuring costs. That led to a loss of $54 million on sales of $1.4 billion in the fiscal year that ended July 3. AST's stock dropped only about a point on the news and is now trading at around 15. But investors and customers are watching: "If they have more write-downs this quarter and next, if they look like they're on shaky financial footing, their customers will start treating them like they had leprosy," says John C. McCarthy, director of technology research at Forrester Research Inc., a Cambridge (Mass.) consultant.
Still, the two companies are a good fit, analysts say. AST factories in California, Hong Kong, and Taiwan have been running at the limit for the past year, and the company has resorted to airlifting computers to Europe to keep up with its growth there. The Tandy purchase gives it a badly needed plant in Scotland to supply its European customers and three more in Fort Worth. AST also gained technologies it lacked: Tandy's GRiD Systems subsidiary is the dominant supplier of pen computers, and Tandy has been in the forefront of building multimedia capabilities into its PCs.
HEAD START. In addition, AST gets some marketing goodies. It gains rights to Tandy's forthcoming Zoomer device, a competitor to Apple's Newton that combines an electronic pocket organizer with communications capabilities. AST also has negotiated a three-year contract to supply Tandy-brand computers for sale through Tandy's Radio Shack, Computer City, and Incredible Universe stores. That gives AST a bigger presence in the consumer market, an area it began to target about two years ago.
The sales through Tandy's channels are key to the deal, accounting for up to 400,000 PCs in the next year, Qureshey figures. "We'd been approached by many companies wanting to be bought, but this was the only one that made sense," he says. "If we bought a company that looked like AST, we'd only cannibalize each other's sales."
Further, the way the deal was structured gives AST a giant head start on merging the two operations. "AST was able to buy only the pieces it wanted," says Howard D. Elias, a lifelong Tandy executive who is now AST's marketing vice-president. "It didn't buy a company or a unit that we have to dismantle in order to integrate." Tandy kept its retail operations and is still trying to sell four other businesses. In July, Tandy laid off more than 500 white-collar employees whom AST didn't hire.
Qureshey figures that a new management team he has assembled over the past year gives AST the talent he needs to absorb such a massive chunk of new business. Working with AST's board, he has spent much of that year quietly restructuring the company away from its entrepreneurial roots by hiring professional managers. A year ago, he engineered the board's ouster of Thomas C.K. Yuen, another of AST's founders, who had served as co-chairman. (The third co-founder, Albert C. Wong--the company's name stands for Albert, Safi, and Tom--was forced out in 1988.)
Since then, Qureshey has reorganized the company along geographic lines and has replaced more than half of AST's senior management with eight new hires, most of them from competitors such as Apple, IBM, and Digital Equipment. "We set up a classic organizational structure with a lot of empty boxes and set out to fill them with top-notch managers," says Carmelo J. Santoro, an outside director and AST's nonexecutive chairman for the past year. "We've already accomplished a major part of what I wanted to do."
RIPPING OUT ROOTS. Santoro, a veteran of the semiconductor industry, and AST's other outside director, Richard J. Goeg-lein, former CEO of hotelier Holiday Corp., set the stage for the new AST in a short, bittersweet meeting with Yuen and Qureshey 14 months ago. Goeglein told them that the outside directors had determined that the company would be better off with a single top executive, Qureshey, and Santoro as chairman. Yuen formally resigned from the board two weeks later, and Qureshey relinquished his chairman's post to Santoro.
Other than in the numbers, the real fruits of the merger are unlikely to start showing up much before early next year. That's when the first jointly developed product, a subnotebook computer, will be launched. But Tandy and AST have been making products for each other since April, so the product lines had already started to converge.
From the day the deal was announced, AST started actively courting Tandy customers. After joining Tandy Chairman John V. Roach to unveil the acquisition to Tandy employees in Fort Worth, Qureshey made a side trip to Tandy's biggest customer, AMR Corp., the parent of American Airlines Inc. "You never like a change, but this one's been relatively painless for us," says Terrell B. Jones, president of AMR's SABRE Computer Services.
"Painless" isn't the word that Qureshey would use to describe the merger. "There are different cultures and different methodologies to overcome, but it's just a part of this marathon we're running," he says. "In the end, it's worth any pain you have to go through." Spoken like a true long-distance runner.Larry Armstrong in Irvine, Calif., with Peter Burrows in Dallas