06/17/96 PACKARD BELL'S CHIEF WAS BORN TO SHOP (int'l edition)

PACKARD BELL'S CHIEF WAS BORN TO SHOP (int'l edition)
But does CEO Alagem's NEC deal give the store away?
Beny Alagem, chief executive officer of Packard Bell Electronics Inc., knows that the only way to survive in the rough-and-tumble of today's personal computer business is to get big--and get big fast. And he's proving that he isn't beyond cutting deals to do it. The ink was barely dry on Packard Bell's agreement last February to acquire Zenith Data Systems from France's Groupe Bull, and he was back at the podium. On June 4, Alagem announced that the privately held Packard Bell would acquire NEC Corp.'s international PC operations--those outside of Japan and China.
For Alagem, joining forces with NEC makes eminent sense in the cutthroat PC business. The new company should sell $8 billion worth of computers in its first full year, up from $4.6 billion for Packard Bell alone in 1995. At the same time, Packard Bell, currently the leader in the virtually profitless business of selling computers through retail channels, can now also offer NEC's higher-margin products, such as notebook computers and network servers, to corporate buyers. NEC gets a huge outlet for its computer chips and other components, low-cost manufacturing for its price-sensitive desktop computer line, and on-the-ground marketing know-how in the U.S. and Europe.
WHO WILL DOMINATE? But the question analysts are asking is: Who's acquiring whom? ``This is not the final shoe to drop,'' says Stephen P. Cohen, research director at First Albany Corp. ``And it's beginning to look like NEC will emerge as the dominant partner over time.''
For one thing, the merged company will change its name to Packard Bell NEC, though it will keep the Packard Bell, NEC, and Zenith brands separate at the retail level. And while NEC's voting stake does not change from its previous 19.9%, the same as Bull's, it is transferring some $300 million in assets, including a Fife (Wash.) notebook computer factory, to Packard Bell. That will net NEC additional nonvoting preferred shares that, when combined with shares it received for a $283 million cash infusion earlier this year, could be converted in an initial public offering. ``We hope to take the company public in the next two years,'' Alagem says, ``and NEC will own as much as 40%.''
That's fine with NEC. Long the dominant player in the Japanese PC market, NEC is under pressure from Fujitsu Ltd., which is determined to gain market share at any cost. By selling its hardware at or below cost, Fujitsu has turned the computer trade in Japan into a commodity business. And that has cost NEC both market share--which is down to as low as 40%, from over 50% three years earlier--and its once-lofty margins.
NEC now needs bigger volumes to make money at lower prices. So any boost it can get through Packard Bell's channels in the U.S. and Europe will help. It can also make up for dwindling computer profits by selling such components as computer chips and CD-ROM drives to Packard Bell's huge Sacramento factory.
The tricky part for Alagem now is to make sure that his pricier Zenith and NEC brands make enough money to offset the losses and cash-flow bottlenecks that seem to perennially plague the company's consumer-PC line. Otherwise, Packard Bell will never be able to pull off the public offering that it needs so badly to fund growth in the future. One good sign: Zenith last month snagged an Air Force contract for servers and notebook and desktop computers that could amount to a cool $1 billion over the next three years.
The thought that Wall Street hasn't exactly been keen on taking Packard Bell public doesn't even faze the irrepressible Alagem, who seems to live for the next deal. ``Our product lines and marketing channels are now expanding tremendously, making us the strongest company in our industry,'' he says. But there are only so many deals Alagem can do before he gives the company away.
By Larry Armstrong in Los Angeles, with Brian Bremner in Tokyo