March 23, 2001 1:20 PM PST

Micron seen as tough sell in PC industry

Micron Electronics on Friday said it is putting its computer operations up for sale, but the history and dynamics of the industry indicate that the company will likely fade away instead.

Although mergers and acquisitions are common in many segments of the technology industry, the PC market is not one of them. Instead, major PC companies typically decline to buy their smaller counterparts, which subsequently continue to lose market share and wither. Divisions of Zenith, AT&T and Texas Instruments, for example, all made PCs at one point.

When mergers or other deals between larger and smaller PC companies do occur, the results usually aren't pretty. Packard Bell, the largest retail PC maker in 1995, received investments from NEC and France's Group Bull, as well as $500 million in bridge financing from Intel. But by late 1999, Packard Bell folded its U.S. operations.

In 1997, Samsung took control at once-mighty AST Research. In January 1999, Beny Alagem, founder of Packard Bell, acquired a license for the AST name.

"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 an interview earlier this month prior to Micron's announcement.

Dean McCarron, principal analyst at Mercury Research, concurred.

"I'm sure they will prove us wrong, but I don't see the value of those in the top end (of the computing business) in combining," he said.

Nampa, Idaho-based Micron ranked No. 12 in U.S. PC sales last year, with 1.3 percent market share, according to Dataquest. That put Micron behind Acer, NEC and Sony. In terms of worldwide sales, Micron ranked No. 18, with 0.5 percent share.

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."

How Micron is divesting itself of its computer business reflects, to a certain degree, the reluctance PC makers feel toward acquisitions: Micron is not selling the division to another PC company.

Instead, Micron is selling it to an undisclosed investment group, which will streamline operations and peddle the division to other buyers. Typically, this is even less efficient than a straight merger.

"When a company announces that it is selling itself, it creates uncertainty and customers drop off," said Charles Smulders, an analyst at Dataquest. "Maybe there is a Japanese consortium that wants to buy them, but getting into the U.S. market would be a difficult proposition."

Prior to Friday's announcement, sources had said Micron was attempting to sell the division to other PC manufacturers in recent months.

Micron CEO Joel Kocher himself has often said that Micron's horizon for success was limited. In 1999, he told investors at a Banc of America Securities conference to give him "two to three years" to succeed--or leave--the PC market. Two years later, his prediction has proved correct.

The biggest PC merger in the industry's history occurred when Compaq Computer bought Digital Equipment in 1998. It took Compaq well over a year to digest Digital, and many analysts say that the results are only showing up now.

The deal, however, was anomalous. Compaq bought Digital for its consulting and services group and its high-end Unix technology. Compaq got rid of Digital's PC division shortly after the deal closed.

Although PC mergers typically don't work, Micron has at least one card potentially up its sleeve: a direct sales operation. Kocher, a former high-level executive at Dell Computer, installed many of Dell's low-inventory, low-cost manufacturing methods at Micron.

Compaq and Hewlett-Packard, two of the largest PC manufacturers, still primarily sell their computers indirectly through dealers and retailers, generally a more expensive route.

Both companies have been putting more emphasis on direct sales to accomplish this goal. Compaq, in fact, bought distribution facilities from Inacom in early 2000 to beef up its direct-sales effort.

"The math doesn't work out that well, by and large," McKinney said, when it comes to buying facilities from other manufacturers.

Micron could provide a company with direct sales know-how. In addition, the company has carved a niche in the government market.

"The government business is a gem," IDC analyst Roger Kay said. "They have a great government business with significant share in that market and a great reputation with government agencies."

Circumstances, though, put some clouds over any prospective deal. For one thing, the list of potential purchasers is also fairly small. Compaq, HP and IBM are the only major PC manufacturers left that do not sell the bulk of their PCs directly. But all three have been investing in direct sales.

The potential for success may be limited.

The industry is "pretty darn consolidated," McCarron said. "The economies of scale aren't there for the major players."

News.com's Joe Wilcox contributed to this report.

 

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