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January 25, 1996

Buyout or Not, Wounded Apple
Will Probably Never Be the Same


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  • Now May Be a Good Time to Buy a Mac
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    Graphic

  • Comparing the Potential Partners

    By PETER H. LEWIS

    The board of Apple Computer Inc. met for a second consecutive day yesterday to try to devise a rescue plan for the fabled Silicon Valley company, which is leaking money, market share, talent and industry support at an alarming rate.

    Despite persistent reports of an impending deal in which Sun Microsystems Inc. would acquire Apple, some executives familiar with recent talks between the two companies said that the two sides remained far apart on the question of price; at least one person said the talks broke off yesterday. With neither company willing to comment, the situation remained unclear.

    But for many analysts, one thing was more certain: Despite the most alluring prospect of a possible Sun and Apple alliance - the creation of a single, dominant Internet computer company - Apple's problems may have become so great that any potential acquirer, Sun included, would be buying a multibillion-dollar headache.

    "Whether they stand alone or are acquired, Apple as we know it is cooked," said Stan Dolberg, senior software analyst at Forrester Research Inc. of Cambridge, Mass. "It's so classic. It's so sad."

    Blaming plunging prices in the intensely competitive market for personal computers, the company last week reported a $69 million loss for its most recent quarter and said it would cut 1,300 jobs. Even before that, executives at several computer and software companies said yesterday, they had been receiving an unusually large number of rĖsumæes recently from Apple employees, including high-level engineers and key executives.

    "Their chief assets are walking out the door," said an analyst at a New York investment company who spoke on condition of anonymity.

    Some analysts, trying to make sense of the takeover rumors, said that Apple may have been leaking word of its discussions with Sun in an effort to stimulate interest among other possible suitors and give a lift to the company's skidding share price. Apple stock ended yesterday at $32.25, up 62.5 cents in Nasdaq trading on volume of more than 5.8 million shares; it set a 52-week low of $29.25 on Monday, just seven months after setting a high of $50.125. Sun's shares also closed lower yesterday, down 62.5 cents to $43.50 on even heavier trading - nearly 12.5 million shares.

    Even if Apple were willing to sell out to Sun or another suitor at bargain-basement prices, "the brain drain will have been so fantastically damaging that you have to wonder why they would want the company," Mr. Dolberg said.

    Yet some industry executives note that Apple - whose Macintosh computers are almost universally revered by the estimated 14 million people who use them -- has many valuable assets that might catch the eye of Sun, I.B.M.Oracle, Sony, Motorola and other companies said to have taken a look at Apple in recent years.

    "I can understand why Sun might be interested in Apple," Roger McNamee, a principal with Integral Capital Partners, investment capital and management firm in Menlo Park, Calif., said. "It has lots of assets, particularly in the area of the Internet. The Mac is easiest Internet access platform out there. It is the preferred platform for Internet software development. It has been surprisingly successful with its new line of Internet servers. It's got to be appealing to Sun."

    According to figures compiled by Internet service providers, Sun dominates the market for the powerful computers known as Internet servers, which are generally based on the Unix software operating system. But Apple has emerged as the most popular maker of non-Unix Internet servers -- ahead of other makes of machines using the Microsoft Corporation's Windows software. That is a surprising succcess given Apple's relatively low overall market share in PC's, estimated at less than 10 percent.

    Part of Apple's appeal to Internet developers is its array of Macintosh software development tools for the Internet's World Wide Web, which allow even casual computer users to create and maintain Web pages. And part of the ease of use of these tools arises from the simplicity of the Apple Macintosh operating system.

    Sun and other companies, including the Oracle Corporation, have expressed an interest in creating low-cost computers designed expressly for connecting users to the Internet. Besides the Macintosh, Apple is said to have several technologies under development that could fill that bill.

    Other obvious assets, analysts said, include a revenue stream of more than $10 billion a year; more than 14 million extremely loyal customers around the world; a globally recognized brand name, and a series of intriguing hardware and software prototypes that, if allowed to develop, may turn into important products.

    For Sun, other analysts said, Apple's greatest strength may be that it is not Microsoft. Sun now derives most of its revenue from hardware but has in recent months gambled heavily on software, including Internet server software and an Internet programming language called Java. Microsoft intends to challenge Sun's software with its own products, especially Windows NT.

    And in the personal computer arena, Apple is the best, if not last, hope for challenging the industry standard now dominated by Microsoft and the Intel Corporation. Sun has struggled to appeal to an audience broader than the scientific, engineering and commercial markets where it is strong. But its attempts to reach the consumer market with its own computers have been unsuccessful.

    And, according to one big Apple investor, a potential buyer may be able to convince itself that Apple's difficulties arise from poor management rather than incurable, maybe fatal flaws.

    "Apple's problems appear to be largely self-inflicted," said the investor, who spoke on condition of anonymity. "There are no signs that Apple's current problems relate to Microsoft Windows. Indeed, there are ample signs of mismanagement. They have been too slow to update products, and they have done a horrible job of forecasting demand. They have nobody to blame but themselves."

    "Sun might be interested," he continued, "only if they concluded that a different style of management can produce very different results."

    But others questioned whether Sun had what it takes to manage Apple, a company more than twice its size in terms of revenue and employees.

    "Apple has some serious production and logistical problems, and questionable economic viability,' said J. William Gurley, an analyst at CS First Boston in New York. "They need - either through hiring someone or someone buying them - help with procurement, forecasting, production and distribution, and that's not what Sun is all about."

    While Apple makes many of the machines it sells, Sun subcontracts the production of its own computers. And the main microprocessor that Sun uses in its machines, called Sparc, is incompatible with the Power PC chip that Apple uses in its computers.

    With such basic incompatibilities, said Tom Copeland, director of workstation research at the International Data Corporation in Framingham, Mass., even if Apple were interested in being acquired, Sun might not be the best partner.

    "This would be a fairly strange marriage," Mr. Copeland said. "The fundamental business issues are hard to reconcile. Apple is a retail company aimed at consumers, which is a different business model from a work-station company that sells through specialized resellers. They have different business models, different gross margins, different technologies."

    Mr. Gurley of First Boston is another of the many analysts unconvinced of the wisdom of Sun buying Apple at anything close to its current stock-market price.

    "You can see what the market thought of Sun acquiring Apple when the stock fell four and a half points Tuesday and was down again today," he said, referring to Sun's shares. "And the joke going around is that the reason I.B.M. was up four points today is because everyone is happy it's not them buying Apple."


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