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Technology Stocks : Creative Labs (CREAF) -- Ignore unavailable to you. Want to Upgrade?

To: DRRISK who wrote (7394)	12/17/1997 3:30:00 PM
From: Will Cunningham	Respond to of 13925

17 Dec 1997 By Jennifer Lien Creative's recent acquisitions based on sound strategy WHAT with all the sharply negative sentiment over Creative Technology and its foreign currency exposure, investors have bashed down the company's shares in recent weeks, barely paying attention to one significant development: Creative's acquisition of US-based audio company Ensoniq. At first glance, the acquisition seems pretty pedestrian: a US$77 million (S$130 million) purchase, just over 15 per cent of Creative's US$463 million cash stash. The purchase, Creative said, would give it access to Ensoniq's PCI audio technology, particularly some bits of software which would enhance Creative's own products. Furthermore, Ensoniq's client base includes top-tier PC makers -- or original equipment manufacturers (OEMs) -- Hewlett-Packard and Gateway 2000. As Ensoniq's cards have "good enough" compatibility with Creative's Sound Blaster standard, the acquisition will "allow us to grow some part of the OEM market", said Creative chairman Sim Wong Hoo at a recent news briefing. Wait a minute. "Good enough" compatibility? Is this the same company which, in the past, had routinely dismissed threats of rival products because their products did not have "true Sound Blaster compatibility"? Defending turf: Could it actually be that Creative is finally dealing with that inevitable problem -- the gradual obsolescence of the Sound Blaster standard? At the recent press conference, Mr Sim was unusually candid: "Other markets have emerged. With Windows, theoretically, you don't need Sound Blaster. All cards theoretically should work." When pressed, he admitted that the Ensoniq acquisition, together with the recent US$14 million purchase of NetMedia, a unit of US-based multimedia company Opti, was a way of insuring Creative against this trend. "It's not buying market share, but it's some way to protect and defend our turf." The logic behind the acquisitions goes like this: Ensoniq has a good brand name and mid-range technology, commanding a smaller premium than the Sound Blaster. This appeals to cost-conscious top-tier PC makers, which are less dependent than second-tier clonemakers on Creative's brand name to sell their products. Opti's NetMedia unit apparently also sells audio technology of the low-end type, appealing to those PC makers who just want bare-bones sound capability. So the purchases give Creative a presence in each of these OEM audio markets -- low-end (Opti), mid-range (Ensoniq) and high-end (Creative Sound Blaster). This strategy is a good one, although it can be argued that Creative doesn't have much of a choice. For one, it shows that Creative is finally responding to changing market dynamics. Until now, it has managed to keep customers loyal with a combination of savvy marketing and cutting-edge technology. But now that it will matter less and less who makes the sound card, especially in the OEM market, the logical next step is: buy a couple of well-regarded rivals and gain their market share. This is what Creative has done with its latest acquisitions. There are also signs that Creative will continue to be sensitive to the audio market's changing winds. Mr Sim said that if customers prefer Ensoniq's products to the Sound Blaster, Creative would "respect that choice and learn to make money from that". Not that the Sound Blaster is going to go away anytime soon, especially in the retail market, where it still gets some 70 per cent of its sales. Indeed, Creative has entered this Christmas season with its strongest slate of new products ever. Almost all existing installed game software is compatible with its cards, and Creative is generally seen as the leader of the pack in terms of power and audio quality. Strong record: Creative still commands some of the best retail shelf space in the industry. There are other competing sound card products that claim to offer more features, such as 128 voices compared with Creative's 64. But there is little evidence that these rivals have made much headway against the mighty Sound Blaster in the retail market. There are some concerns that Creative will struggle with product transition costs in coming quarters, but its recent track record shows a tight rein on costs and lean inventory, even through last year's product change from the Sound Blaster 16 to the AWE64. As for fears of margins slipping from a closer focus on the OEM market, Mr Sim has promised to keep gross margins consistent in the low-30s, and a strong OEM presence provides a useful hedge should retail market conditions turn weak. Investors' fears may be slightly exaggerated, given that Creative is now trading at a price-earnings ratio as low as eight times, compared with the industry's 14 times and other multimedia stocks in the mid-teens. This is one piece of news, among others, that investors should chew on -- before they join the selling. ÿ -------------------------------------------------------------------------------- c Copyright Singapore Press Holdings Ltd, 1997. All rights reserved.