May 1, 2001 10:30 AM PDT

Micron Electronics makes final PC sale

Micron Electronics said Tuesday that it has sold the assets and liabilities of its PC business to investment firm Gores Technology Group for an undisclosed amount.

Gores specializes in buying ailing businesses and turning them around. Most recently, Gores purchased The Learning Company from Mattel, then resold it to French software maker Ubi Soft.

The deal is expected to close within approximately 30 days, Micron said. Once it is complete, Gores is expected to attempt to sell the business to another PC maker.

"Given the realities of the tough PC environment, and our desire to conserve cash to fund our hosting growth strategy, we believe this deal provides the best possible outcome for our shareholders and speeds our path to profitability," Joel Kocher, chairman and chief executive officer of Micron, said in a statement.

Turning around the ailing PC company, though, could prove a tall order. Razor-thin margins and tight competition have made the PC market incredibly difficult even for large companies such as Compaq, according to computer executives and analysts. Smaller PC companies like Micron are also relatively unattractive acquisition targets. Instead, companies in this position face a different fate: they go out of business.

"The big four (Compaq, Dell, IBM, HP) will continue to survive and grow," Mike Winkler, executive vice president of Compaq's global business unit, said in an interview this week. "The others are in question."

In March, Micron said it was exiting the PC business and merging with Web hosting company Interland in a $130 million stock deal with the goal of transforming itself into a hosting company as well.

Micron Electronics signed a letter of intent to sell the PC business to the then-unnamed Gores on March 22, after it offered the business to other PC makers.

"We've been trying to sell the business for several months, and as the industry has continued to worsen, it became clear that it was in the best interest of our shareholders to complete our exit rapidly, cut our losses, and focus on our growing Web hosting business," Kocher said in a statement.

Under the agreement, Gores will assume assets and liabilities of Micron Electronics' PC business, and Micron will contribute $70 million in cash to be used as working capital.

Executives from Micron Electronics' PC business said they don't expect much to change for the company in the near term, except for its name. Micron's PC business will be called Micron PC, a slight change from its MicronPC.com moniker. The company will continue to produce PCs for government, small and medium-sized business and consumers.

Over the long term, Gores will primp Micron PC for sale.

However, "They don't have any set time at which they expect to turn the company over," Ross Ely, area vice president of relationship marketing, said in a phone interview. "Or they could just keep it as part of their technology portfolio."

"The key priority in the immediate term is to focus on our areas of strength," he said. "We don't expect any forays into new areas."

Once the sale is closed, Micron will turn its attention to building its Web hosting business. The combined business, formed from its homegrown HostPro and Interland's hosting business, will take on the Interland name.

Thanks to the sale, Micron expects to have more than $200 million in cash and other liquid assets to help launch the new Interland hosting business. The operation, headquartered in Atlanta, will include six data centers.

"This transaction preserves cash and positions us to launch the HostPro/Interland combined company with a fully-funded business model, and the resources to take advantage of opportunities as the industry consolidates," Kocher said in a statement.

Micron will no longer fund the PC business, once its sale is complete. However, the company's existing management and product line are expected to remain intact, according to a letter to customers posted on the company's site in early April.

The letter, written by Michael Adkins, president of Micron's PC division, says among other things that the leadership at Micron's PC division is expected to remain intact and policies regarding warranties remain unchanged.

Micron Electronics recently sold its SpecTek memory business to parent company Micron Technology.

Analysts and executives, however, see turning around Micron as a daunting challenge. In the first quarter, Dell saw its shipments grow through aggressive cost cutting. Compaq saw shipments decline in the U.S. while HP saw shipments go down worldwide and in the U.S.

Competition on costs will also increase, putting pressure on everyone in the industry.

"We will continue to be an aggressor on lowering costs," Tom Meredith, senior vice president of business development at Dell, said at a presentation Monday at the J.P. Morgan Chase H&Q Securities conference.

Meredith said the policy likely would force others out of busines. "I am happy to see other people go out of business."

PC companies aren't terribly attractive as takeover targets either. Compaq's Winkler said the company is not looking at any acquisitions. Dell has always had a policy of growing internally and not through acqusitions. The company has only made one acquistion in its history, and that was to get into the storage business. The results have been mixed.

"It is hard to find a successful example of one PC company buying another," Webb McKinney, vice president of Hewlett-Packard's personal computing group, said in a recent interview.

The aversion to acquisitions comes from the nature of PCs themselves. Computers made by one company are generally similar to PCs from another. By purchasing a smaller PC company, a larger company is mostly acquiring only the customer base.

"But are customers loyal? No. The reality is that you can't really buy a customer," McKinney said. "By and large, the consolidation should happen the old-fashioned way, by gaining market share."

Analysts believe Micron Electroncs' PC business will survive, but the division's long-term prospects are uncertain.

The PC business has a couple of strong points, including government contracts, which make up about 45 percent of its sales, said Roger Kay, director of IDC's desktop research group.

"The retail endeavors, especially, have failed and have to be retired," he added. "To some degree, by funding it a bit, Joel (Kocher) has given enough so (the PC business) can live to ride another day."

Gores, in its attempts to resell the PC business, would likely emphasize the government business and also tout its ability to provide contract manufacturing. However, a potential sale ultimately depends on how the company is packaged and what the potential terms are.

"I think the company should operate as a separate entity," Kay said.

However, "It could have a positive outcome," Kay said. "I think it's actually as good a scenario as could be expected. "

 

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