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
"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
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.