Creative re-enters graphics market

[sbp]

http://biz.yahoo.com/rf/020311/sin92613_2.html

SINGAPORE, March 11 (Reuters) - Computer peripherals maker Creative Technology Ltd on Monday unveiled plans to re-enter the graphics market by taking over loss-making U.S.-based 3Dlabs Inc for US$103.7 million.

Singapore's Creative, known for its Sound Blaster sound cards, plans to buy the 72 percent in 3Dlabs it doesn't already own by paying one-third in cash at US$1.20 per share and the rest in stock at US$2.40 per share.

The deal works out to US$3.60 per share, a 22 percent premium to 3Dlabs' closing price on Friday of US$2.95. Shares of 3Dlabs have tripled since the end of December.

Some analysts said they were concerned whether Creative was making the right move after having taken big losses in the graphics business in the late 1990s. The company had reduced its exposure to the graphics sector barely two years ago.

``The acquisition of loss-making 3Dlabs...deviates from Creative's earlier statement on concentrating on its core audio business and de-emphasising the highly competitive storage and graphic business,'' said GK Goh analyst Jonathan Ng.

Ng said Creative's bid for 3Dlabs translated into a high price-to-book ratio of 4.3 times.

Creative shares, suspended in the morning pending the announcement, were volatile. After hitting a high of S$24.50, up S$1.10, they eased back to finish down 10 cents at S$23.30.

``The company (3Dlabs) is small relative to the other graphics leaders now, so it's not easy at all. If they want to go into the gaming market, it will be a lot more work,'' said an analyst with a European bank.

HIGH PRICE

Sim Wong Hoo, Creative's founder and chief executive officer, said that after analysing 3Dlabs' product lines and technology roadmap, he believed it had a significant competitive advantage in the graphics space with its high-performance graphics technology.

``For the first time, we will own substantial graphics intellectual property and a formidable graphics patent portfolio that will allow us to achieve a higher level of returns...as we re-emphasised the graphics category,'' he said.

3Dlabs' latest graphics chips will be included this year in workstations built by Hewlett-Packard and Compaq.

The purchase could be add to Creative's earnings in the first half of the next calendar year, excluding any charges related to the acquisition, Sim said.

``This is a very different opportunity than when we were exclusively a graphics card provider that relied solely upon chips from other vendors,'' he said.

Speaking to reporters at a news conference, Sim said the move would allow Creative to create synergy between its audio and graphics business and have better control over the product cycle.

The graphics business would also have potential for high margins like its audio business, which was generating margins of more than 30 percent, Sim added.

He said 3Dlabs would launch ``a highly scaleable chip'', which would allow it to create a family of graphics chips to target new graphics market segments.

The chips could go to the mass market by the end of this year while being scaled up for the high-end market.

On the price of the acquisition, Sim said 3Dlabs had great technology and there was value to be extracted in the future.

3Dlabs reported an operating loss, excluding inventory reserves and one-time charges, of $6.2 million for the fourth quarter to December against a $9,000 profit in the third quarter. Its fourth quarter revenue was $10.1 million compared with $20.1 million in the third quarter.

($1 equals S$1.82)

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Kind of a strange move. Creative said it was concentrating on its core market. That is why Creative stopped selling videocards over here in the US. Then they go and do this.

It seems like a Mutt and Jeff marriage. 3Dlabs makes high end workstation market graphics videocards. Creative basically makes mass market products.

Years ago 3Dlabs did have a couple chipsets used in consumer level boards. But they produced images that had graphical glitches and missing texture problems. Creative was one of the companies that used one of those chipsets (Permedia2 chipset).

Nvidia's Quadro chips, ATI's FireGL lineup pro graphics, and 3dlabs Wildcat and Oxygen chips compete with one another in that high end workstation market.

So Creative is doing this to gain a foothold in the high end workstation market and to use 3Dlabs tech to enter the mass market. If Creative wanted to just enter the high end workstation market why not buy Elsa who produce Nvidia's Quadro range? In terms of the mass market: why not buy 3dfx for chump change when 3dfx was going down? After all Creative owned a chunk of 3dfx stock. Or why not buy STM Graphics graphics division which is currently up for sale?

Creative does have deep pockets and a significant retail presence which is good for mass market products.

Supposely we will see a new Creative 3Dlabs mass market card by the end of this year.

Overall we are going to have to see how this turns out.

[Speedfreak]

I guess they are just trying to be creative and get a chunk of the video market again.

[sbp]

3Dlabs Shareholder Sues to Block Creative Technology's Purchase

San Jose, California, March 14 (Bloomberg) -- 3Dlabs Inc.'s shareholders would be harmed by the computer graphics chipmaker's proposed acquisition by Creative Technology Ltd., according to a lawsuit.

Creative, the world's biggest sound card maker, said on Monday it would pay $103.7 million for the 72 percent of 3Dlabs that it doesn't already own so it could re-enter the graphics business as a maker of both graphics chips and cards.

Creative plans to pay $1.20 in cash and $2.40 in Creative shares for each 3Dlabs share, a price that undercuts the value of 3Dlabs, shareholder Elizabeth James alleges in her lawsuit filed yesterday in Santa Clara County Superior Court in San Jose, California.

``The proposed sale is wrongful, unfair and harmful to 3Dlabs' public stockholders,'' James said in her suit. The $3.60 price is ``inadequate'' and 3Dlabs directors Tor Braham, Yavuz Ahiska and Neil Trevett breached their fiduciary duty and ``failed to properly value'' the company, James said.

Officials at 3Dlabs did not immediately return a call seeking comment.

3Dlabs, which is registered in Hamilton, Bermuda and has offices in Sunnyvale, California, withheld favorable information from research analysts' reports until after the purchase was announced, James said in court papers.

``If the acquisition is consummated, plaintiff and other members of the class will no longer own shares in a `growth' company or benefit from the revelations of the analyst reports which defendants concealed, but rather will be cashed out of their 3Dlabs stock for just $3.60 per share,'' James said.

3Dlabs shares closed at $3.46, unchanged.

James seeks class status for her suit and an injunction barring 3Dlabs from going ahead with the purchase at the current price.

Shares of Singapore-based Creative fell 20 cents to close at S$22.60.

[NuTs62]

Originally posted by DarkFury
Personally, I wish that Creative would stay out of the video market (especially since they SUCK so to say when it comes to "driver support" at times).

Let 'em focus on sound technology...

More competition tends to drive prices down, and have companies strive for better products. Doesn't mean you must purchase their new video products. Perhaps they do suck with their driver support, but it'd be interesting to see what they try to do.

[Cantacuzene]

I agree, all this will do is give someone else a chance to sneak up on them on the sound dept. Bad move Creative. Then again, I dont have an MBA so I might be wrong.

[MazaNaza]

I wish Creative would pick up the Radeon 8500 chip and make some boards for ATI. I'm very eager for some decent competition to return to the GPU market, and I'd love to see ATI score some major partners to counter the, what, 800000000000000000 companies who currently make nVidia boards

I just want to see if ATI can pull off making its own boards and having other people make them, kinda like Intel with motherboards (except less lawsuits).

--> Norm

[Merlin]

This had to be done. Creative is in a declining business (sound cards) It's mature and fairly undifferentiated. Yeah, the people who frequent this board know the difference between a good sound card and a run of the mill one, but John Q. Public does not. Graphics cards are still a developing higher growth business with HIGH MARGINS.

I personally think they should have gone the other way and attempted to leverage their brand and make gizmos like Logitech, but I understand the reasoning behind the acquisition. The only question is if they can keep up this the technology at that end of the market of if they will be resigned to second tier crap.

As for the lawsuit. Propably won't go anywhere. Everytime there's a deal announced someone feels jilted. That's the nature of the deal making business.

[Hoser]

I think Creative should stay in the sound card business. I wish companies would stop thinking that they should be like Microsoft. What I mean by that is stay with what you do best, don't try to do and control everything. Concentrate on your core business, don't stagnate, and listen to your customers. Nothing pisses me off more than companies that won't respond to customer e-mails. A company only gets one chance to make a good impression with me. If they fail, my money goes to one of their competitors.

[NuTs62]

Originally posted by Hoser
I think Creative should stay in the sound card business. I wish companies would stop thinking that they should be like Microsoft. What I mean by that is stay with what you do best, don't try to do and control everything. Concentrate on your core business, don't stagnate, and listen to your customers. Nothing pisses me off more than companies that won't respond to customer e-mails. A company only gets one chance to make a good impression with me. If they fail, my money goes to one of their competitors.

I must agree with Merlin on this one. Sure they have a great core product, their sound cards. But they can't stay confined to just that. They have to expand their sights on other related markets. That's the kind of stuff that I've been learning in my business and marketing classes. They have a brand name, and people tend to associate their sound cards with quality. That is the reason why acquiring another segment of the computer market is smart. People will say, "hey, I know Creative makes great sound cards, and they're a great company, I might as well buy their graphics card too!". Of course right now, the techies may say Creative graphics boards will suck, this and that. That is based on their previous record. It'd just be great for them to create new technology. In the end, the consumers benefit. And like I said before, with them coming in, its yet another player in the market, to give increased competition. Every company will have to step it up a notch to distinguish themselves from the rest of the pack.

MazaNaza, to my knowledge, ATI already licenses out their technology, such as their 8500. Not in the U.S., but in the UK, there is some other brandname for that product.

[MazaNaza]

Originally posted by NuTs62

MazaNaza, to my knowledge, ATI already licenses out their technology, such as their 8500. Not in the U.S., but in the UK, there is some other brandname for that product.

Yeah, I knew that, and actually they do it in the US too, via Hercules who recently licensed the AIW 8500. What I meant was that I hope ATI can pick up more partners than just Hercules, FIC, and I think two others. I'd love to see ATI with as many partners as nVidia so that consumers can start to have choices again.

--> Norm

[NuTs62]

I haven't owned any Creative products besides their Sound Blaster cards. When I purchase quality graphics cards, I don't want my choice to be between ATI, nVidia, and the other dozens of nVidia boards. Creative may not make the top notch stuff, and perhaps it sucks for you, then you've learned your lesson, don't touch their stuff. What do you want? The only graphics boards on the market to be nVidia? They wouldn't have a reason to keep their prices competitive, because there would be no competition. Thats why the more players in the market, the better. It drives down prices!

And you talk about creative not building their own product, just licensing it. What do you call all those companies who use the nVidia chipset? Sure, nVidia is on top of the world right now. But what goes up, must come down. When there is no more competition, who will you compare nVidia's cards to? Just another nVidia product.

Having a choice to choose whichever you want is great. The more selection, the better. I may never buy a Creative graphics card, or perhaps nVidia too. But I'd sure as hell would love having the freedom of choice to.

[Merlin]

DF,

I understand your skepticism due to some bad experiences in the past. Will it be better this time? Who knows? Only time will tell. But the bottom line is that Creative does need to grow the business into new areas where it's offerings won't be commodities (like the vast majority of sound cards are). Graphics cards (unlike sound cards, CDs, 3.5 inch drives, cables, keyboards, etc) still provide the opportunity for profitable growth.

Is video cards the right avenue for Creative to pursue profitable growth? I don't know, but I do know that they needed to do something new.

[Raider007]

i got a oxygen workstation card, i hope they don't screw up the drivers for it