Packard Bell And Zenith Data: The Tortoise And The Tortoise?

It looks like a good fit, but analysts are generally sour

From scratch, Beny Alagem built Packard Bell Electronics Inc. into a $4.5 billion PC company in just 10 years. Trouble is, he keeps having to shore up its foundations.

In a complex, nearly $700 million deal announced on Feb. 7, Packard Bell said it is taking over Zenith Data Systems Corp., a unit of France's Groupe Bull. In exchange, Packard will grant Bull, which already owned 20% of Packard, preferred shares worth up to $400 million. At the same time, Japan's NEC Corp., which also holds 20% of Packard, said that it would pump an additional $283 million into the PC maker, also in exchange for redeemable preferred shares. Voting control of Packard will remain in the hands of Alagem and other insiders.

PHASE TWO? On the surface, Zenith and Packard look like a good fit. Packard is the leading seller of PCs through U.S. mass market retailers and has just begun selling to commercial accounts through traditional computer dealers. Zenith sells almost exclusively to companies and government agencies. Zenith makes notebook computers and network servers, higher-margin products that Packard Bell does not offer. Further, more than half of Zenith's estimated $1.3 billion in sales are overseas, where Packard Bell did less than 10% of its business last year. "What you're seeing is the beginning of the second phase of Packard Bell's growth," says Alagem, Packard's CEO.

There's just the little matter of financial trouble at both companies. "Bad money after bad money is what I would call it," says Kimball H. Brown, an analyst at market researcher Dataquest. Zenith lost more than $100 million last year, according to a company insider. Once a major player in notebook computers--it sold one out of every five portables in 1989--Zenith has seen its market share fall below 3%. One problem: It was late in offering a version based on Intel Corp.'s Pentium chip. And its major government contract, a $700 million deal supplying desktops to the Air Force, has pretty much run out. Bull has been looking for a buyer for the subsidiary for more than a year, so it welcomed Alagem's offer to consolidate it into Packard Bell.

Alagem won't confirm that Packard Bell lost money in 1995, as analysts contend, but the company is showing all the signs of being in trouble. Wall Street believes it is strapped for cash, which makes a public offering an untenable option. Hitting up partners for cash infusions is the company's best recourse for funding growth. NEC's new investment brings its total contribution since August to $453 million. And in November, Intel disclosed that it had converted part of one customer's $470 million accounts-receivable tab into a loan. Analysts say the customer was Packard Bell.

TOUGH YEAR. Another big downer: The Christmas selling season did not meet Packard Bell's projections. As a result, in January, it laid off 250 employees at its Sacramento plant, about 6% of the workforce there. Worldwide, its sales were up 35%, to $4.5 billion. But analysts say Packard bet heavily on Intel's 75-megahertz Pentium chip and got caught with excess inventory that it had to unload at fire-sale prices. Alagem has repeatedly and vehemently denied such reports: "All the rumors you've heard about our inventory of Pentium 75s are totally fabricated," he says.

This year could be even more demanding. The growth of the U.S. PC market will slow to 16% from last year's 22%, according to researcher International Data Corp. Plus, there will be tough competition from such companies as Hewlett-Packard Co. and Acer America Corp.

Still, Packard Bell has gone to the brink and back at least twice in the past three years, and the irrepressible Alagem thinks he'll bring it back again. "Now, we have a complete global enterprise," he beams. Brave talk. Time to make good on it.

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