Japanese computing giant NEC announced yesterday that it is investing an additional $300 million in Packard Bell NEC and grabbing a sizable stake in its American computing arm as it aims to bolster the company's infrastructure and get its sales back on track.
The deal, as earlier reported by CNET's NEWS.COM, calls for NEC to invest $240 million in received preferred stock with full voting rights, increasing its stake in the merged company to 49 percent, from nearly 20 percent. Meanwhile, minority investor Groupe Bull in France guaranteed $20 million to Packard Bell NEC and now will have a nearly 13 percent stake in it.
The new deal brings NEC's total investment in the computer maker to $1.3 billion, said Luis Machuca, NEC executive vice president and general manager of NEC. Also, the board of Packard Bell NEC will now be comprised of four directors from the original Packard Bell company, three from NEC, and two from Groupe Bull. NEC's investment expands its presence on the board by one.
Packard Bell NEC is comprised of a Packard Bell division that concentrates on selling computer systems to retail customers and an NEC Computer Systems division that sells to corporate customers. Machuca said the new investment will not change the combined company's current structure.
Packard Bell NEC domestic shipments as a whole declined by 7 percent during the third quarter, according to International Data Corporation. By contrast, the company's chief competitors saw sales increase by more than 60 percent.
"It is a vote of confidence in a big way to the NEC Now model, which will be a benefactor of most of this investment," Machuca said. "It will further allow us to build capabilities such as expansion of the call center."
Packard Bell NEC saw its retail market share slide this year, largely as a result of the introduction to the market of a slew of low-cost computers from Compaq and Hewlett-Packard. Sources close to Packard Bell NEC have said that NEC has been putting increasing pressure on Packard Bell to improve its bottom line.
On the corporate side, Packard Bell NEC launched its NEC Now "build-to-order" program, which allows customers to buy computers directly by phone or over the Internet, earlier this year. The transition to the direct sales model, however, initially resulted in a sales glitch that has since rebounded somewhat. The new investment will help cover the infrastructure costs that arose from the debut of the NEC Now program, as well as future expansion of the company, Machuca said.
Additionally, Machuca noted that NEC Computer Systems plans to aggressively market new products in 1998. Specifically, the company will release its first workstation product, as well as a series of Web-servers featuring double and quadruple processors, during the first half of the year.
Other sources said that NEC Computer Systems will release an eight-way Intel-based server next year as well.
The story of the Packard Bell company, founded by Israeli immigrants, is a quirky one. The company's name has nothing to do with anyone working for it, rather, it was purchased from a old television manufacturer and was selected, sources say, to make customers believe that the group was associated with Hewlett-Packard and/or the Bell telephone empire.
Although the company has been saddled with a reputation for substandard quality in the past, the low prices it offered throughout the 90s succeeded in winning it huge sales and market share.
How Packard Bell achieved these low prices, however, has always been a subject of debate. Critics have alleged that the company makes use of old parts in order to drive down costs. In fact, the company once was caught engaging in this practice and subsequently was required by regulators to disclose any future use of recycled parts on its packaging.
But the company also has a track record of good, sharp bargaining and low overhead. Its fabrication facility near Sacramento, for instance, was a former Army base that was decommissioned earlier in the decade. Packard Bell has paid as little as $1 a year for the facility, and also has received tax credits from the state of California for hiring people off of welfare.
Nevertheless, the past year has not been a banner one for the company. Not only did Packard Bell slide in market share during the year, but its competitors began to invade its turf in the bargain-basement price arena. Packard Bell actually was the first computer company to come out with a sub-$1,000 PC, pointed out Matt Sargent, an analyst at Computer Intelligence, but Compaq has most effectively leveraged price points in the space in order to boost sales, primarily in the consumer market.
"The sub-$1,000 is what made Compaq go up in retail," Sargent said.
Reuters contributed to this report.