Gores Braves the PC Market With A No-Money Deal for Micron Unit

The personal computer market is such treacherous terrain that hanging a “keep out” sign is doing a would-be entrant a favor. Unit and sales growth have slowed and are forecast to move downward in the U.S., major players are slugging out a bloodletting price war, the sluggish economy is crimping demand, and several competitors are either leaving the scene or mulling an exit. Yet, there is a PC rookie willing to mix it up in the uninviting environment. It’s Los Angeles-based private equity firm Gores Technology Group, the same Gores that earlier this year took over seemingly hopeless case The Learning Co. from Mattel Inc. and turned it into the black in 75 days. Now Gores is trying to put its rescue technique to work on the former PC division of Micron Electronics, which got rid of its No. 1 headache so it could go on to develop its more promising Web-hosting business. Why is Gores treading where Micron fled? Dave McGovern, Gores’ m&a director, who helped nail down the deal, says that the Micron unit is a “tougher challenge” than Learning Co. but offers “an opportunity to pursue a restructuring of the existing business.” “We see a pretty solid base of revenues there,” he says. “So while the industry itself may not be the most attractive industry, we think there is an opportunity to make this business a decent, profitable business.” The price was an obvious inducement to give it a shot. Emulating a pattern set in the Learning Co. deal, Gores paid nothing up-front, received a $70 million payment from Micron Electronics for taking over the apparently unsalable PC division, and promised Micron a cut if the business starts making money later. McGovern described the terms as “a very low price from our position in terms of the amount of liabilities we assumed with respect to the assets we acquired.” But McGovern adds that his firm believes that the Micron PC unit has the makings of a solid competitor under the new ownership. “The value we saw there was that they have very strong manufacturing processes, good customer relationships, a recognizable brand name, and generally all of the right things for a decent business in this industry,” he comments How that will be translated into better performance is now being worked on by the operations people, although cost cutting and getting the management to “focus on the bottom line rather than on the top line” are part of the plan, McGovern says. “I think it’s inevitable that we will have to pursue some cost-cutting objectives in order to achieve profitability,” he says. Although Learning Co. had troubles tuning into the market for entertainment, education, and games software, its core weakness was internal. Gores consolidated divisions, slimmed down software titles, sold the entertainment segment, and laid off more than 300 people. Micron PC woes, by contrast, are centered in the market where Dell Computer Corp., Compaq Computer Corp., and Gateway Corp. are key battlers in the warfare being waged principally on price. Moreover, the market doesn’t look too lucrative. International Data Corp., in a projection issued last January, forecast thatdesktop PC sales would slip in the U.S. to the $45 billion range in 2004 from $60 billion in 1999. However, International Data also projects continued growth in PC sales outside of the U.S., an uptrend in portable PCs (laptops) across the board. Does this open the opportunity for the Micron PC division to reposition in a promising niche? McGovern can not say at a time when the operations people are working up the restructuring but notes that they intend to “identify additional revenue opportunities and consolidate where we can consolidate.” Niche possibilities opened by the projections include overseas sales, emphasis on portables, reduced-price machines based on lower costs, or, at the other end, higher-quality machines and specialized machines for more skilled users. McGovern concedes that Gores has its work cut out for it at the PC unit and that much of the team that resuscitated Learning Co., including operations chief Jim Bailey, has been reassigned to the PC maker. “It’s a tougher challenge,” McGovern says. “It’s hardware versus software. The margins are thinner and it’s a more difficult business generally to turn around. We recognize that the task is probably more challenging than Learning Co. was.” Nobody at Gores, however, is projecting another 75-day whirlwind. McGovern says that no timetable has been established, although his company won’t waste any time. “We plan to do everything we can as soon as possible,” he says. “But as to when the Micron division will become profitable, it’s impossible to predict in view of current market conditions.”