Fool.com: Packard Bell Bites the Dust (Fool Plate Special) November 3, 1999

FOOL PLATE SPECIAL
An Investment Opinion

Packard Bell Bites the Dust

By Brian Graney (TMF Panic)
November 3, 1999

Another death knell for the indirect PC model rang out across techno-land today as NEC Corp. (Nasdaq: NIPNY) announced that it is abandoning its Packard Bell PC brand name in the U.S. The move, which will result in the loss of a startling 2,600 jobs, culminates a four-year slide by Packard Bell from the PC industry penthouse to the industry doghouse. "Effectively, this means the Packard Bell brand will disappear in the U.S.," a Packard Bell spokesperson told The Wall Street Journal.

Rather than analyzing what the demise of Packard Bell means for the future of NEC (hint: Life will go on and the Japanese electronics giant will survive), investors should use today's news to reflect on the overall direction of the PC industry in this country.

In hindsight, perhaps the best thing the head honchos at Packard Bell and NEC ever did for investors was to decide not to take the PC business public, despite IPO speculation that dated back to 1995 when NEC first acquired a 20% stake in Packard Bell. In the intervening four years, NEC increased its stake in the brand name to 88%, with France's Groupe Bull picking up the remaining 12% share. But while the investment dollars poured in, Packard Bell's market share in the U.S. went down the drain. In the first quarter of 1995, Packard Bell was the number one U.S. PC vendor with a 10.8% share, according to International Data Corp. This year, Packard Bell hasn't cracked the top five in any quarter.

All told, NEC and Groupe Bull dumped an estimated $2 billion into the Packard Bell brand only to see the venture rack up a total of $1 billion in combined losses over the past two years, according to the Journal. That's a pretty dismal return on capital, considering the mammoth returns direct PC sellers such as Dell (Nasdaq: DELL) and Gateway (NYSE: GTW) have been able to rack up over the same period with much smaller capital investment levels. Ultimately, though, Packard Bell's insistence to fight a death match with other indirect vendors in the low-end of the PC market was the decision that sealed the company's ignominious fate.

While many people have decried that the falling-price nature of the PC business will eventually lead the industry down the commoditization trail blazed by transistor radios and TVs, it's hard to ignore that the smart PC companies have figured out ways to keep building value. For instance, Dell's decision not to match aggressive pricing on all levels allowed the company to keep its margins up earlier this year, even though revenue growth suffered as a consequence. And despite the worries of doomsday theorists in the beginning of the year, Dell's U.S. market share has expanded and its annualized return on invested capital continues to be north of 200%.

Still, even with falling margins, the direct vendors' focus on asset management can keep the cash rolling in. This was an economic concept that Packard Bell evidently couldn't -- or wouldn't -- grasp, as evidenced by its losses over the past two years and the projected $150 million loss this year. On one hand, it destroyed its margins by competing full bore in the low-end PC market. On the other hand, it put itself at a competitive disadvantage by tying itself to the less-efficient indirect model. Looking at things through this framework, today's end result is not all that surprising.