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BenQ May Be Getting What It Paid For


It looks like the bargain of the century. BenQ Corp., a scrappy Taiwanese consumer-electronics maker, is getting the mobile handset business of Siemens for nothing -- and the German company is even eating $430 million in costs surrounding the transaction. The deal, announced on June 7 by Siemens CEO Klaus Kleinfeld and BenQ Chairman K.Y. Lee, propels little-known BenQ into the No. 4 slot among the world's handset makers. "It's a deal too good to be true for BenQ," says Daniel Wang, an analyst at brokerage Primasia Securities in Taipei. "They get the whole business and a decent brand for free."

But is it in fact too good to be true? What BenQ is getting is a business that has tormented Siemens for years. After grabbing the No. 4 slot and 9% market share in global handset sales in 2002, the unit has slipped to No. 5 this year, with a share of just 5.5%. Last year it racked up losses of $615 million on sales of $5.8 billion, brokerage Merrill Lynch & Co. estimates. And Siemens' efforts to cut costs at the unit have been hampered by unions in Germany, which have resisted moving jobs to lower-cost locations.

There's no doubt that BenQ could use a lift. The company has little brand recognition in Europe and the U.S., and its handset business has been hit hard by a tumble in orders from Motorola Inc. -- its biggest customer -- after BenQ launched its own brand. BenQ's first-quarter profits plunged 90%, to $9.7 million, as revenues fell 23%, to $1 billion, compared with the year-earlier period.

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The Siemens deal does solve some of those problems. BenQ says it plans to start using the Siemens name, then gradually introduce co-branded phones to help build the BenQ name in Europe and the U.S. The German company's global reach will also help BenQ penetrate new markets such as Latin America. Moreover, it will inherit factories in Germany and Brazil, and research facilities that have been working on next-generation products. "This kind of intellectual property is crucial to our success," says BenQ President Sheaffer Lee.

Some, though, wonder whether BenQ has what it takes to turn the unit around. "Feedback on BenQ's products hasn't been great, and they've been late getting products to market," says Vincent Chen, an analyst with brokerage CLSA Ltd. in Taipei. And if BenQ can't cut costs enough, it may not be able to stem losses. "The risk is that Siemens could wipe out BenQ profits in 2006," says Kent Chan, an analyst with Citigroup in Hong Kong.

BenQ will also have to wrestle with labor issues that have plagued Siemens, and take over 3,700 workers in high-cost Germany. Although BenQ must honor labor contracts through 2006, the company says it may have to shutter the German facilities. There's no doubt that Siemens has rid itself of a headache. But for BenQ, making this the deal of the century will take plenty of hard work.

By Matt Kovac in Taipei and Jack Ewing in Frankfurt


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