Adam Lashinsky
Shareholders of chipmaker Micron Technology (MU Quote - Cramer on MU - Stock Picks) and its 61% owned PC subsidiary Micron Electronics (MUEI Quote - Cramer on MUEI - Stock Picks) are wondering how much a money-losing personal computer business with $1 billion in annual sales is worth. For a clue, they can look at how much the firm that's agreed to buy Micron's PC unit paid for its last major purchase of a distressed asset: nothing.
(MAT Quote - Cramer on MAT - Stock Picks). Now, sources say Gores Tech is the previously unidentified firm with which Micron Electronics says it has signed a letter of intent to sell the PC unit. Gores Tech agreed to take The Learning Company off Mattel's hands last October in a transaction that included no cash payment, but did promise Mattel a share of any future profits at The Learning Company. Given that Micron Electronics wants out of the boxmaking racket in the worst way -- it disclosed earlier this week that it will merge with Web-hosting firm Interland (ILND Quote - Cramer on ILND - Stock Picks) to become an Internet services company -- accepting merely the promise of someone else's turnaround may be the best it can get. But a zero-cash outcome might not thrill shareholders of either publicly traded entity, depending on the terms of the PC unit's transaction. (Micron Technology raised eyebrows last week by delaying the disclosure of its quarterly consolidated financial results, pending the announcement from Micron Electronics. The chipmaker now says it will report complete results Thursday, after previously promising to report early this week.) Micron Electronics -- once prized by computing enthusiasts as the boxmaker with the highest-performance machines, but lately a rounding-error also-ran of the PC industry -- said last week that it had signed a "nonbinding letter of intent to sell its PC business to a large, private technology-equity investment firm." According to two sources with knowledge of Micron's negotiations, Gores is the company hoping to strike a final deal to buy MicronPC. Citing confidentiality restrictions, neither Micron Electronics nor Gores Tech confirmed the identity of Micron's would-be buyer. "Getting this deal done is important," says Joel Kocher, chairman and CEO of Micron Electronics, who will hold the same titles at the merged Web-hosting company. Asked what an unprofitable, No. 11-ranked U.S. personal computermaker is worth, he replied, "We'll have to see. We don't have a deal yet." Alec Gores, chairman of the privately held buyout operation, declined through a spokesman to comment. Despite not being the household name of more established buyout groups that have dabbled in technology like Texas Pacific Group or Clayton Dubilier & Rice, 9-year-old GTG has completed a number of deals with high-profile companies. In addition to last year's purchase of The Learning Company, GTG last year also bought units from Cabletron Systems and Nortel Networks. Gores told The Wall Street Journal last year that he would send a "SWAT team of 12 or 13 people with technical expertise and expertise in human resources" to The Learning Company in order to solve its problems. GTG issued a press release in early March bragging that The Learning Company had turned profitable within 75 days of GTG's rescue. In Micron's PC division, Gores will have a potentially bigger challenge on his hands. The PC operation recorded just over $1 billion in revenue for the fiscal year ended Aug. 31, 2000; that's 66% of Micron Electronics' overall sales. (Other revenue comes from an existing Web-hosting business, HostPro, and SpecTek, a component recycling line that Micron Technology is buying from Micron Electronics.) Gross margins were a razor-thin 12.8%. In the quarter ended Nov. 30, the last for which Micron Electronics disclosed full results, PC systems accounted for $275 million in sales, or 68% of the company's total. Operating losses on PCs totaled $17 million. Last week, Micron Electronics reported net losses for the fiscal second quarter ended March 1 of $168.9 million, or $1.75 per share. That figure includes losses for the PC business, though Micron declined to report revenue in the PC sector because the business is to be discontinued. The gargantuan per-share loss is nearly equal to Micron's overall value. Its shares closed Tuesday at $1.90, down 12%, giving Micron a market value of about $184 million, down 88% in the past year. Kocher, the former senior Dell Computer (DELL Quote - Cramer on DELL - Stock Picks) executive who has struggled to reposition Micron Electronics as a supplier to small- and medium-sized businesses, notes that Micron's own smallness ultimately was its undoing. "Our purchasing power just wasn't big enough," he says, compared with giants like Dell, IBM (IBM Quote - Cramer on IBM - Stock Picks), Gateway (GTW Quote - Cramer on GTW - Stock Picks) and Hewlett-Packard (HWP Quote - Cramer on HWP - Stock Picks). A decade ago, Micron could appeal to performance-driven customers who'd pay up for faster, more robust machines. "Now everyone has one," Kocher says. All this raises the question: What does Gores Technology Group want with Nampa, Idaho-based Micron's PC outfit? Presumably a so-called "white box" manufacturer that sells only to technology distributors could eliminate enough overhead and marketing expense to eke out a profit on Micron's operations. Perhaps the Gores SWAT team knows something about the PC business that Dell veteran Kocher and his memory-chipmaking parent do not. Or perhaps GTG is that rare bottom-feeder that knows how to buy a distressed property when its industry has reached its nadir.
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