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Micron forgoes PC business

In a $130 million stock deal, Micron Electronics says it will exit the PC business and merge with Web hosting company Interland.

Micron Electronics said Friday it is exiting the PC business and merging with Web hosting company Interland in a $130 million stock deal that will transform the company into a hosting company.

Micron will lay off 400 people in its PC unit, about 20 percent of the workforce, the company announced.

The all-stock deal will combine Micron?s HostPro Web hosting subsidiary with Interland, creating a new company that will use the Interland name. Interland stockholders will own 30 percent of the new company. The company went public in July.

The company said today that it plans to sell its business, which makes PCs, to a private technology-equity investment firm. Financial terms of that deal were not released.

The company will also sell its SpecTec division, which sells refurbished random access memory, to parent company Micron Technology. Earlier this week, Micron Technology delayed its earnings release because of the changes at Micron Electronics, which is majority-owned by Micron Technology.

The new combined company is expected to post pro forma revenues for fiscal 2002 of $160 million to $180 million and to save $20 million to $30 million in the first year through synergies. The company also predicted reaching break-even earnings before interest, taxes, depreciation and amortization (EBITDA) by the second quarter of 2002, with positive cash flow three quarters later.

Micron CEO Joel Kocher will become chairman and CEO of the new company; Interland CEO Ken Gavranovic will be vice chairman.

"Hosting will serve as the foundation for many opportunities as SMEs (small and medium-size enterprises) increasingly outsource IT. This merger strategically positions us to take advantage of all the aspects of the third wave of computing, as the real power of computing moves from the desktop to the network," Kocher said.

The new company will have its headquarters in Atlanta, with six data centers, 112,000 customers and more than 227,000 hosted Web sites.

The HostPro division was Micron?s smallest, but it has delivered strong growth. In recent interviews, Kocher said he had high hopes for HostPro, which was funded largely by profits from SpecTek.

In the first quarter, that division posted revenues of $14 million, up 19 percent compared to the fourth quarter of 2000. In recent interviews, Kocher has said he had high hopes for HostPro, which was funded largely by profits from SpecTek.

For the second quarter, the HostPro division posted revenues of $14.7 million, compared to $6.6 million in the year ago-quarter.

That division is now considered the ongoing operations of the total company, with the PC business and SpecTec being classified as discontinued operations. The firm reported a loss from continuing operations of $9.7 million, or 10 cents per share, compared to a 4 cent per share loss in the year ago quarter.

Including the discontinued operations, the company's net loss for the second quarter of 2001 was $168.9 million, or $1.75 per diluted share. In an interview, Kocher said the company would not offer specifics about the discontinued operations or break out which unit accounted for most of the losses.

Kocher indicated he wanted to move on with the new hosting strategy and deflected questions about the units to be sold. The new company will have $200 million to $220 million in cash on hand and no debt at the completion of the deal; executives also hinted that the company would grow through acquisitions.

"We?re in a unique position to capitalize in this downturn by becoming a consolidator," Kocher said during a conference call.

And while tough economic conditions have hurt many technology firms?-including Micron?s own PC and DRAM businesses?-Kocher said it could be a boon to the hosting business.

"Current economic positions are putting even more pressure on small businesses to outsource their IT needs. As users are expanding to communicate with suppliers and clients their once simple Web sites are (becoming more complicated)," Kocher said.

Despite the growth at HostPro, Micron's business and SpecTec business still accounted for 97 percent of revenues during the first quarter.

It's not hard to understand why Micron would want to exit the PC business. The company was the third-largest direct PC vendor behind Dell Computer and Gateway, but has had trouble turning a profit. Recently, Compaq Computer, Dell Computer and Hewlett-Packard have issued warnings for their upcoming quarters.

Analysts had expected Micron to exit the PC business at some point. Merrill Lynch recently lowered its prediction for PC unit growth to 12.5 percent from 15.4 percent. Research firm IDC put U.S. PC growth in the fourth quarter at 0.3 percent year over year, down 3.6 percent from a quarter earlier.

The SpecTec sale will also include certain real estate assets and intellectual property. After paying off existing SpecTec profit-sharing obligations, the deal will give Micron $42 million. The assets will be transferred April 6.

Staff writer Joe Wilcox contributed to this report.