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Micron-NetFrame deal hurts stock

The PC maker's bid to acquire network server manufacturer NetFrame doesn't sit well with NetFrame investors.

PC maker Micron Electronics (MUEI) said today that it would acquire network server manufacturer NetFrame Systems (NETF) for $14 million--a move that didn't sit well with NetFrame investors, who immediately dumped the stock.

NetFrame's share price plunged 26 percent today to close at 31/32 of a point, down 11/32 from yesterday's close. Micron's stock, meanwhile, hovered near yesterday's close and ended the day at 16-5/8, down 3/8.

Under the proposed deal, Micron will pay $1 in cash for every share of NetFrame. The acquisition is designed to provide Micron with immediate entry into the rapidly growing, high-end enterprise server market.

NetFrame revamped its servers to use industry-standard technologies last April, abandoning its midrange Intel-based server systems with proprietary features. The strategy was an attempt to increase its share of a higher-volume market by moving away from proprietary technology.

The move may give a boost to Micron, which last month said its third-quarter sales will be about 10 percent below the previous quarter's. It blamed recent price cuts on its PC systems and start-up costs for its international operations.

Micron itself had long been rumored to be a takeover target for Compaq Computer. Some investors were openly opposed to such a deal because of Micron's relatively small market share and its disparate business operations, which involve everything from chip manufacturing to mail-order computers.

"It doesn't make a lot of sense. Micron is a no-name clone. Gateway made sense," said Jeff Matthews, general partner at Greenwich, Connecticut-based investment firm Ram Partners. "[Compaq] would have to spend a lot of money for a business with a lot of problems."

Today's announcement is likely to push the possibility of a Compaq buyout further into oblivion.