Packard Bell to gain fed entry in ZDS buyout

Zenith Data Systems may offer federal government customers a chance to buy PCs from consumer market powerhouse Packard Bell Electronics as the result of Packard Bell's pending acquisition of ZDS from Groupe Bull.

After the merger is finalized, ZDS Federal Systems will have a wide array of options at its disposal, according to Pat Gallagher, vice president of sales at the company. Those options could include sharing components with Packard Bell PCs, selling Packard Bell PCs with the ZDS label applied and even selling Packard Bell-brand PCs on federal contracts, he said. The deal was announced Feb. 7.

"I can see a number of situations where we might add on or modify [on a contract] one of their products," Gallagher said.

Such a scenario would provide an opening into the federal market for a PC vendor that is battling Compaq Computer Corp. for the overall market-share lead in the United States. When Packard Bell started to challenge for the lead last year, Compaq dramatically boosted its participation in the federal market.

Until now, Packard Bell has concentrated on its consumer market base, despite persistent rumors of an imminent entry into the federal market.

But with ZDS as an asset, Packard Bell can attack government, commercial and foreign markets more effectively.

The deal is also designed to bolster Packard Bell's sagging finances. Packard Bell's two large minority shareholders, NEC and Groupe Bull, each hold stakes of nearly 20 percent in the company and have poured in another $650 million investment to strengthen the company's balance sheet. The company said the additional investment from its giant international shareholders should allay any concerns about its longevity.

ZDS and Packard Bell are quick to assuage fears that ZDS will be swallowed up and will disappear. "Nothing could be further from the truth," Gallagher said. "We will still be actively involved in many markets with ZDS products."

Packard Bell stated that the company plans to invest in ZDS and use the subsidiary to spearhead its efforts in new product areas and vertical markets. Packard Bell named government, education and commercial customers as the vertical markets ZDS will target.

Zenith's greatest presence is in the federal market, according to Bob Dornan, senior vice president of Federal Sources Inc. "The brand-name awareness of Zenith in the commercial world is zero," he said. "But it is very high in the federal market." ZDS has participated in three out of the four Air Force Desktop contracts.

That awareness will provide Packard Bell with the channel it needs to introduce its products to federal customers. At the same time, ZDS will gain access to Packard Bell's supply of low-cost components. "It looks like a nice marriage of capabilities," Dornan said.

ZDS should have no trouble adding Packard Bell products to contracts it holds, he said. "There is virtually no limit to the things you can do after you get a contract," he said.

While some potential buyers might fear lower quality in Packard Bell-built PCs, the firm's new Sacramento, Calif., plant is ISO 9001-certified for quality, Gallagher said. "They didn't take on [firms] like IBM, Apple and Compaq by making a low-quality machine," he said.

The price-sensitive consumer PC market is possibly the only market with profit margins as slim as the federal PC market, Gallagher said. Packard Bell's experience in this environment will be helpful for ZDS, he said. "They are world-class at doing high-quality production on razor-thin margins."

Even if ZDS does not sell Packard Bell PCs, it can apply the company's low-cost methods to its own production and exploit Packard Bell's high-volume prices with suppliers to get better deals on the parts needed to make PCs. Zenith's annual PCs sales number between 300,000 and 500,000 units, Gallagher said. "Packard Bell has one more zero in there, and that makes a huge difference in costs," he said.

"Packard Bell will utilize its state-of-the-art manufacturing infrastructure to deliver a broad line of products to the corporate, education and government markets," said Beny Alagem, president and chief executive officer of Packard Bell, in a prepared statement. ZDS not only provides access to new markets but also extensive research and development, well-regarded customer service and an extensive patent portfolio, he said.