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Alain Couder's Futile Effort to Merge Packard Bell with Micron He came "this close" to a $1 billion deal, but parent NEC pulled the plug Only a few months ago, Alain Couder's goal was within sight -- and yet still so far away. The French-born computer-industry veteran, who had taken the reins of struggling PC maker Packard Bell-NEC in July, 1998, was making substantial headway in fixing the one-time U.S. market leader in the home PC market. He had slashed the product line from 36 to 6, cut the staff by 40%, and was on track to lose a mere $100 million this year. That, in itself, was huge improvement over losses totalling $1.14 billion in 1997 and 1998. But if he failed to hit that $100 million target, he had been warned by execs at parent company NEC, which owned 88% of the unit, that they would pull the plug, he told Business Week in an interview this summer. Japan-based NEC was dealing with its own financial mess, and it had little patience for Packard Bell, having already poured more than $2 billion into the struggling PC maker since 1996. Couder never reached his goal. On Nov. 2, NEC announced that it would lay off up to 80% of Packard Bell-NEC's workforce, shutter its huge plant in Sacramento, and pull out of the U.S. consumer PC market altogether. It was a deathknell for the Packard Bell brand in the U.S., which had picked up a reputation for shoddy quality. LIVING IN EUROPE. Now, NEC is expected to announce on Nov. 9 that it is forming a new global PC unit, which will combine all of NEC's PC operations outside of Japan. It will focus on selling PCs -- particularly notebooks -- to corporations. But it will continue to sell consumer PCs under the Packard Bell name in Europe, where the brand remains strong, says Jeff Cooke, who will promoted from head of U.S. commercial PC sales to president and chief operating officer of the new entity. As for Couder, he and 11 other subordinates will leave the company at yearend. Couder did not go down without a fight, Business Week Online has learned. Earlier this spring, he launched merger talks with Micron Electronics CEO Joel Kocher. Neither Micron or Packard Bell-NEC sources would comment on the talks on the record. But sources at both companies say the idea was for Micron to buy Packard Bell-NEC. The deal was no potential blockbuster. The combined entities would have had a market share of only roughly 5%. Says International Data Corp. analyst Roger Kay: "Mergers among second-tier players is about bulking up to stay in the game -- but this wouldn't have added much bulk." Says another source involved in the talks: "If you pour two lukewarm cups of coffee together, you still have a lukewarm cup of coffee." NEW HYBRID. Still, it could have helped the two units stay in the game. Micron sells its computers directly over the Web and through phone sales -- the same model that has made Dell Computer and Gateway stars on Wall Street. But the company had fallen way behind these fast-growing juggernauts. While Kocher had done an impressive operational makeover since joining Micron in January, 1998, it had failed to regain growth after suffering from poor marketing and sloppy execution. Indeed, its U.S. market share slipped from 2% in the second quarter of 1998, to 1.2% in the same period of 1999. By adding NEC, with its well-regarded product engineers and credibility with corporate buyers, the idea was to create a new kind of hybrid. Rather than just sell the plain-vanilla gear like Dell and Gateway, which do little R&D of their own, it could use the proven direct-sales model to sell more innovative fare. "This is a missed opportunity. I think it would have been outstanding," says one negotiator from Packard Bell-NEC. At first the talks were promising. While the two sides were talking widely diverging prices -- Micron wanted to pay $200 million, while Packard Bell thought it was worth $1 billion, says one source -- Couder and Kocher quickly began to see eye-to-eye, sources from both companies confirm. Indeed, by the time talks broke down in September, they had settled on a price of almost $1 billion, says a Packard Bell-NEC source. "We started very far apart. But when the deal broke down, we were within a few percent. That's not what broke up the deal," he says. HALF-HEARTED. What went wrong? The problems began when Couder sought the support of his parent company. Executives at NEC, then knee-deep in a major reorganization announced this summer, didn't have much time to consider the deal, and yet insisted that its execs -- not Couder -- lead negotiations with memory-chip maker Micron Technology Corp., which owns 66% of Micron Electronics. That approach threw a wrench in the works. For starters, NEC sent only mid-level staffers to negotiate with Micron Technology CEO Steve Appleton. Even Kaneo Tosaka, who runs NEC's global PC business, didn't make the trip to Micron's Boise headquarters. "They were worried about their own problems in Japan," says one Packard Bell-NEC source says. Indeed, NEC only became more convinced it could emerge as a power in the more profitable commercial PC market, where it has been gaining share, by keeping its U.S. subsidiary. "NEC was interested in the deal -- but not very intersted," says the source. By September, the talks had terminated. The end for Couder came in late October, at a Packard Bell-NEC board meeting at its Mountain View, Calif., headquarters. Having notified the parent company that his unit would lose $150 million this year, his team prepared three options for how to proceed: Get more money from NEC and continue with its current plan to stage a comeback in U.S. consumer and commercial markets; shed only the U.S. consumer PC operation; or fold the U.S. operations into the rest of NEC's PC operations outside of Japan. "I DISAGREE." But Couder never got the chance to present the options. Board members opened the meeting by saying the decision was made: The U.S. operation would be scaled back to become a marketing and sales arm for commercial PCs, with the resulting downsizing. According to one attendee, Couder was honorable in defeat. "I disagree, but if that's the decision, I will implement it," he told the board. But will the decision work? Clearly, NEC still has some cleaning up to do. It has agreed to cover expenses related to the plant closure and other restructuring costs. The resulting operation will start life with roughly $3 billion in annual sales, $170 million in cash on hand, and will be profitable, say Packard Bell-NEC sources. And since NEC was never was enamored with Couder's focus on the cutthroat consumer PC market, with its minute margins on cheap sub-$1,000 PCs, the new entity will get much more support from Japan. "I'm very excited about the prospects," says Cooke. It probably can't be any worse than NEC's painful PC experience of recent years. By Peter Burrows in San Mateo, Calif. EDITED BY DOUGLAS HARBRECHT _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ |
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