Why Phillips must sharpen up its act

Philips chairman and president Cor Boonstra is already looking at ways to spend the $6bn (3.6bn) his company is likely to bank when Seagram buys its 75 per cent share in PolyGram.

Assuming the deal goes ahead – and it has yet to get clearance from regulatory authorities in the US and Holland – Philips says it could make an acquisition shortly.

“There is a clear opportunity to make financial investments and the sale of PolyGram will make that fund considerably bigger,” says a company spokesman. “Don’t be surprised if there is a quick announcement about an acquisition. It could be a communications company, a brown goods company or any company with a strategic niche in the market, such as a multimedia company.”

Philips’ move out of music and film rights is a reversal of a strategy it has pursued in competition with rival Sony. It once appeared logical to unite the production of videos and CD players with the ownership of the films and music that accompany them. Owning both enables the company to push new formats by producing music or videos on the new system. But PolyGram is not the money-spinner it once was – profits slumped by 88 per cent in the first quarter of this year to 4.75m compared with 38.6m for the same period last year, due to soaring marketing costs and softer record sales. And with Seagram eager to make an acquisition in the field, the sale was too good an opportunity to miss.

So Boonstra has chosen a different path for Philips. The company is to focus on “connectivity”, developing technology to make phones, computers and TV sets to “talk” to each other as convergence of technology increases.

A key factor in establishing itself in this field will be its ability to turn round troubled US telecoms division, Philips Consumer Communications. The joint-venture – with Lucent, formerly part of AT&T – in which Philips has a 60 per cent stake, has yet to show a profit. In the first quarter of 1998, PCC lost US$125m (75.7m) as a result of production and distribution problems. But Boonstra says the division, which was launched last year, will move into profit by next year.

Speculation is rife about Philips’ takeover targets. Some sources suggest Nokia or Motorola as possible suitors, though others say the company is unlikely to make such a large purchase and will probably opt for several smaller niche acquisitions – it could, for example, look at handheld computer manufacturer Psion, which has licensed its operating system to Philips.

While its substantial war chest will enable Philips to fill in the gaps in its portfolio through acquisition, whether the companies it buys can work well as part of the Philips behemoth is another matter.

Marcel Metze, author of the book “Let’s Make Things Better” about Philips, says the company has been hamstrung in its acquisitions by an old, engrained culture.

“Traditionally Philips has always had trouble with acquisitions and joint ventures. It’s an old and strong culture – the company is more than 100 years old. Lucent (as part of AT&T) was also an old company with a very strong culture and this ran into trouble.

“Philips has also been using expatriates for a long time and it is only recently that the company has brought in foreigners. In overseas markets, the operations have nearly always been run by expatriate Dutchmen, who are not really in touch.”

Philips has been criticised for its multi-business unit structure which is at odds with its merger strategy. Different departments jealously guard their own budgets and are unwilling to talk to one another. Although much has been done to break down the barriers, the process is a slow one.

In its defence, the company says it has now halved the number of business units it once had – and has introduced other measures, such as internal miniature trade fairs, where individual research and development units showcase their work to other departments. On top of these structural considerations, there is a question mark over whether Boonstra really has an eye for the right acquisition.

The former Sara Lee marketer started a programme of rationalisation and disposals which effectively reversed the company’s slide into loss, following his appointment in 1994. His credentials as a financial and marketing sage are unquestioned. However, he does not have a background in technology, and this is seen a major stumbling-block.

“He’s very much a financial man, who believes shareholder value is everything,” says Metz. “The company is performing in that sense. But if you don’t keep the focus on developing technology, in the long run you won’t make it. His basic handicap is that he doesn’t know technology and while he can judge a company financially, he cannot judge it in terms of technology.”

Boonstra is 60, so he may not be with the company long enough to see whether new acquisitions deliver on their promise.

Along with acquisition, Philips is likely to sell off other parts of the organisation, such as divisions which fall outside the consumer electronics arena. These could include domestic appliances, personal care or Philips medical systems. “There is a question mark over medical. It is sound financially, but it is not as emotionally attached to the company and is not one of the fundamental blocks of the organisation,” says one source.

Philips is trying to sharpen its consumer focus, and is investing heavily in its brand, with plans to spend an additional $75m (45.4m) on establishing brand recognition in the US over the next year.

“We are hoping to bring the Philips name into the higher end of the market there, keeping the established MagnaVox brand at the lower end,” says a company spokesman.

The next two years will be critical as Philips pushes its connectivity strategy. The problematic PCC division will play a vital role in its plans, so the Lucent joint-venture must be turned round.

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