Irvine’s AST Buys Tandy’s Computer-Making Operation
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IRVINE — AST Research Inc. Wednesday agreed to buy Tandy Corp.’s computer manufacturing operations for up to $175 million in a deal that will more than double AST’s domestic share of the personal computer market and rank it among the nation’s leading computer makers.
With roughly $1.7 billion in annual sales, AST would still be smaller than global rivals such as IBM, Apple, Compaq, NEC and Commodore. But the Orange County company would leapfrog competitors Dell, Packard Bell and Gateway 2000 and gain its first European manufacturing plant.
“Acquisitions have not been a part of our history,” said Safi U. Qureshey, AST’s chief executive officer, “but this was such a good fit because we hardly compete with each other.”
The deal between Tandy and AST is part of the consolidation of the personal computer business, which is racked by price wars that have made it increasingly difficult for smaller companies to compete.
For Tandy, the parent company of Radio Shack, it signals an end to computer manufacturing and a focus on retailing. AST officials hope that the larger operation will allow them to cut operating costs, get better deals from parts suppliers and offer even lower prices.
“You have the haves and the have-nots in the computer industry, and AST is one of the haves,” said Steve Eskenazi, an analyst at investment bank Alex. Brown & Sons in New York. “It’s too early to say whether they got a good deal. But this definitely allows them to get to critical mass faster.”
AST said it will buy Tandy’s three computer manufacturing plants in Texas and another plant in Scotland. The deal, to be finalized by July 1, also calls for AST to purchase Tandy’s GRiD Computer Systems portable computer subsidiary and its European computer marketing unit, GRiD-Tandy Europe. The deal gives AST long-sought manufacturing capacity in Western Europe, along with a head start in the emerging technology of computers that use electronic pens to enter data.
Tandy, based in Ft. Worth, Tex., has struggled for years to make money in electronics manufacturing and was an early player in personal computers. Qureshey could not say how many people would be added to his Irvine-based company, which now has 4,000 workers. Tandy officials Wednesday could not specify how many of its employees work in the divisions to be sold.
Stock analysts said the deal offers strategic advantages for AST: It could give AST a 6.2% share of the U.S. computer market, up from 2.8%, according to estimates from International Data Corp., a market research firm in Framingham, Mass. Worldwide, AST’s market share of all units sold could rise from about 2.2% to 4.1%.
As consolidation in the computer market continues, the top 10 computer makers now account for 54% of the total market, according to International Data. AST would rank as the sixth largest computer maker worldwide.
“It’s a good gamble on AST’s part, buying market share cheaply,” said Eric Lewis, manager of PC hardware research at International Data in Mountain View, Calif. “Mergers in the PC industry are relatively rare in the top 10.”
AST, an acronym of the first-name initials of its three immigrant founders, was started in a garage in 1981. It grew fast making add-on boards, which enhanced the power of IBM-compatible PCs, then began selling computers in 1986. The company is one of five Orange County companies on the Fortune 500 list.
Tom Yuen, a co-founder who resigned as AST’s president 11 months ago after a power struggle with Qureshey, said he is skeptical of the acquisition.
“I think it’s too dangerous,” he said. “Everyone is suffering from eroding profit margins. What is going to happen if the demand subsides? I’m perplexed. They may have bitten off more than they can chew.”
AST would seem to be sufficiently cushioned, say most analysts. It reported having $121 million in cash on March 31 and an additional line of credit of $175 million.
For several years, AST, which already has plants in Asia and the United States, had hoped to add a facility in Europe as part of its worldwide manufacturing strategy. The company’s plant in Fountain Valley now operates at full capacity.
Tandy is strong in multimedia computer applications, which combine the technologies of high-quality sound, video, graphics and text in a hybrid of consumer electronics and computer equipment.
“From Tandy’s perspective, in this computer industry, volume is a critical factor in maintaining profits and staying competitive,” said Dwain Hughes, treasurer for Tandy Corp.
Assuming that AST picks up all Tandy accounts, the acquired assets could generate an additional $700 million in annual revenue for AST, analysts said.
Qureshey said the company had to pounce on the opportunity with Tandy, which was losing money and preparing to make the manufacturing operations a separate corporation to be called TE Electronics, which would have been spun off to existing shareholders.
“It was not making sense for them, and they wanted to focus on their other businesses,” Qureshey said. “We wanted to focus on the computer business, and now we’ve picked up what used to be a closed market: Radio Shack stores.” Tandy owns 4,500 Radio Shacks.
Tandy will take a charge against earnings of $70 million related to the divestiture of all of its manufacturing operations, including the computer plants.
The assets involved and exact price of the deal still have to be worked out. AST will pick up Tandy’s Victor and GRiD computer brands, as well as contracts to manufacture computers for other parties.
AST will also assume certain unspecified liabilities for the Tandy computer unit, which lost $38 million for the six months ended Dec. 31. AST will not buy Tandy’s printed circuit board, audio and videotape, consumer electronics and furniture manufacturing units.
James Reynolds, an analyst at investment bank Wedbush Morgan Securities in Los Angeles, said Wednesday that he had not analyzed the AST deal. But his concern is that AST has not addressed the fundamental problem that all computer companies face: how to make money in an industry where profit margins are shrinking.
“I just don’t see this business becoming healthy,” Reynolds said. “How does this deal help?”
AST will pay over three years either in cash or in cash and notes. It will not acquire accounts receivable for the Tandy assets.
“Tandy is taking a write-off, and so AST is getting the assets for less than they are worth on the books,” said Eugene Glazer, an analyst at Dean Witter Reynolds in New York.
In Wednesday’s trading on the NASDAQ market, AST’s stock rose $1 a share to close at $16.125. Tandy, also traded on NASDAQ, gained $2 a share to close at $31.125.
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