What do a lumbering French mainframe computer maker and an upstart U.S. seller of home computers have in common? They both want to increase their presence in the booming personal-computer market. That's the rationale behind the announcement June 22 that France's Groupe Bull, with $6 billion in annual revenues, will take a 19.9% stake in Packard Bell Electronics Inc., with about $1.2 billion.
Who? Packard Bell, a company lots of people think they might have heard of. It was spun off in the breakup of the phone system, they figure, or maybe it has something to do with Hewlett Packard Co. Some even recall--correctly--a TV maker by that name in the 1950s.
Really, though, Packard Bell is the biggest seller of personal computers in mass-merchandise stores such as Sears Roebuck, Circuit City, and Wal-Mart. And by buying into it, Bull overnight gains access to 7,000 retailers for its struggling Zenith Data Systems Corp. subsidiary, an Illinois-based PC maker it paid $511 million for in 1989. It also gains the help of a company with a reputation for designing inexpensive desktop machines. "I see a lot of synergies between our companies," says Zenith Data CEO Jacques Noels. "I'm looking forward to a winning alliance."
A GODSEND. Under the arrangement, Zenith will supply its notebook computers for sale under the Packard Bell label, and the two firms will jointly develop and build new desktop PCs starting this fall. The deal, which Bull would not put a price tag on, is a godsend for Zenith, which some analysts estimate has lost money for the last three years. Bull does not want to give up its only access to the PC market or a chunk of the U.S. market. But its willingness to fund Zenith Data's research and development has worn thin as its own mainframe losses have climbed. The $5.7 billion government-owned computer maker has lost $2.7 billion since 1990. Plus, the French government has called for a turnaround plan that prepares Bull for privatization--and that means more spending cuts.
The clearer winner is Packard Bell. The Chatsworth (Calif.) company desperately needed some financial resources to help it fend off the growing competition in the mass-market channels it pioneered. Seven-year-old Packard Bell has been wildly successful in selling where America shops. Walk into almost any department or discount store, electronics retailer, or warehouse club, and Packard Bell occupies prime real estate in the computer section.
Still, Packard Bell's title as king of the retailers is getting a lot harder to hang on to. For the five years ended in 1991, it had a net loss of $10 million, which threatened to stall future growth. And with IBM, Compaq Computer, and other giants jumping into the chain stores, "they're much more vulnerable than they've been in the past," says Richard Zwetchkenbaum, an analyst with International Data Corp. Where Packard Bell once fought for shelf space against obscure brands such as Laser, Magnavox, Positive, and Leading Technology, now it is competing against the companies with deep pockets.
PAMPERED RETAILERS. The Bull deal should change all that. "Our competitors have had no advantage over us except for their lower cost of capital," says Beny Alagem, Packard Bell's chairman and CEO. "This will help put our cost of money on a par with other computer manufacturers." By cleaning up the company's highly leveraged balance sheet, the deal will enable it to negotiate far more favorable terms from lenders. Over the past six years, interest alone has cost it more than $60 million, leading to losses in 1989 and 1991, according to Securities & Exchange Commission filings. The privately held company will now say only that its operations are profitable.
HEADACHE. Despite its financial problems, Packard Bell's low manufacturing costs--and its pampering of its retailers--has allowed it to hold its own and even thrive against substantial new competition. Packard Bell's sales spurted 37%, to $925 million, last year, and it expects revenues to pass $1.2 billion this year. That kind of selling pace allowed Packard Bell to increase its leading share of the retail market from 32% in 1992 to 37.7% in this year's first quarter (chart).
It has also led to a huge headache--a high rate of returns. The cost of those returns even cost it an initial public offering, planned and then withdrawn last year. According to its IPO filing with the SEC, more than $140 million worth of shipments in 1991--about 17%--were returned to the factory. Of that, $40 million was unsold inventory, which Packard Bell was able to update and reship. Of the rest, less than 2% were defective; everything else was returned because buyers were confused, disappointed, or determined to have something else--a projection TV, for example.
While returns are common among home-electronics retailers, running 10% to 15% of everything sold, a year ago Packard Bell set up a formal program to minimize them. Some of the changes are simple, such as including a warning gn the backup MS-DOS diskettes telling customers that the program was already installed in the computer. Other changes were more substantial. Packard Bell spent a year writing a program, called Navigator, to protect novice users from the ambiguities of Microsoft Corp.'s Windows operating system.
Now Packard Bell is jumping on the technology train. It has vowed that PCs based on Intel Corp.'s next-generation Pentium chip, will soon be on the market. And it has been early with multimedia computers. This year, multimedia-equipped PCs will account for as much as 30% of its sales. Not bad for that company with the vaguely familiar name.