Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!americast.com!americast.com!americast-post Newsgroups: americast.ibd From: americast-post@AmeriCast.Com Organization: American Cybercasting Approved: americast-post@AmeriCast.com Subject: Executive Update Date: Mon, 26 Oct 92 13:29:30 EST Message-ID: <2.1992Oct26.132931@AmeriCast.com> TITLE Executive Update Pressure Builds On Data Storage Device Makers Conner's Plan To Buy Archive Is Sign Of Blurring Lines Between Segments Brian Deagon Last week's move by Conner Peripherals Inc. to speed up its evo- lution from a leading disk drive maker into a much broader data storage product supplier will step up pressures on other industry players. Conner late Thursday announced a letter of intent to acquire Cos- ta Mesa, Calif.-based Archive Corp., the world's largest supplier of low-end tape drive Competition products, for $11.25 a share, or $210.3 million, in cash. On Friday, Archive shares jumped 33/4 to 101/2 on hectic volume of 6.2 million shares. The planned transaction continues the consolidation under way in the data storage industry since the late 1980s. On Friday, Hewlett-Packard Co. completed its acquisition of privately held Colorado Memory Systems Inc., the third-largest supplier of low- end tape drives, with fiscal 1992 sales of $131.5 million. Hewlett has aggressively moved up in the disk and tape storage market over the past five years. "The acquisitions by Conner and Hewlett will create a whole new level of competition in the disk drive market," said Dennis Waid, president of Peripherals Research Inc. "I don't expect all the disk drive companies to follow suit, but Western Digital and Seagate have to take notice, and this should put Conner ahead of Seagate in terms of annual sales," said Waid. Seagate Technology Inc., based in Scotts Valley, Calif., is the largest independent supplier of disk drives worldwide. Seagate declined comment Friday on the industry acquisitions or on indus- try speculation that it also plans to enter the tape drive mark- et. Possible Rexon Purchase Industry sources say Seagate is considering an acquisition of Rexon Inc., the parent of Simi Valley, Calif.-based Wangtek Inc., the second-largest supplier of low-end tape drives behind Ar- chive. On Friday, Rexon shares advanced 11/4 to 103/4. "Looking out over the next five years, I see a maturing industry consist- ing of a handful of suppliers offering a complete array of storage platforms," said Mike Peterson, president of research firm Peripherals Strategies Inc. "Among the survivors, I see Conner, Seagate, Hewlett, Matsushita and Sony, and then maybe after that it's a free-for-all," he said. In light of recent events, industry analysts now expect the large data storage manufacturers to evolve from selling stand-alone disk and tape peripherals that personal computer manufacturers add into their products into an industry that will package and sell complete data storage subsystems aimed primarily at the booming computer network market. "There's an opportunity to create a whole new value-added business," said Peterson. Archive and Conner said last week they expect to sign a definitive agreement in about 10 days. Archive also agreed to cancel a pending public offering of five million common shares at $7.75 each. Much of the proceeds were to be used to pay off outstanding debt of about $103 mil- lion. If San Jose, Calif.- based Conner terminates the letter of intent or does not enter into a definitive agreement, it will buy 1.9 million newly issued shares of Archive common stock at $6.75 a share, except under undisclosed circumstances, the companies announced. Bold Gamble "Our intent to acquire Archive is consistent with our strategy announced last June to transition from a leading disk drive com- pany to a leading storage solutions company," Conner Chairman Finis Conner said in a statement. Conner laid the groundwork for a bold move into network storage systems in June when it created a new tape drive unit based in San Diego. A main focus of Conner Technology Inc. is the development of a unique and proprietary tape drive viewed by many analysts as a bold gamble. "I estimate it would cost Conner $100 million to be effective with that tape product, to go in and build capacity and market share, and that would only be in a very narrow part of the market," said Ian Gil- son, an industry analyst with L.H. Friend & Co. "Now, with a net outlay of $200 million, they can acquire an existing company with one of the broadest product ranges in the business," he said. Archive, founded in 1980, is a pioneer developer and manufacturer of tape storage devices used to back up computer disk drives. Between 1983 and 1989, its revenue increased at an annual rate of 42% while earnings rose an average 32% a year. The company grew primarily on the strength of so-called cartridge tape drives, which store data on quarter-inch magnetic tape. In 1989 and 1990, Archive expanded its core market by acquiring Maynard Elec- tronics Inc., a value- added distributor, and Cipher Data Pro- ducts Inc., another tape drive industry pioneer, for $28 million and $140 million, respectively. Archive also expanded its product line to include half-inch tape drives and another class of drives using helical scan recording techniques like that found in home video recorders. The acquisitions sharply increased Archive's size and product breadth, but the money it borrowed to undertake the acquisitions dragged down earnings. At the same time, end- user demand softened due to slowing economic growth. The company recorded a $45 million restructuring charge last year. Archive has indicated it expects to report earnings for the fiscal year ended Sept. 27 of about 79 cents a share, less than it earned in 1990, when earnings were down 27% from the year before. Last year, Archive lost $3.78 a share, largely due to a restructuring. Profitable Maynard "Maynard is the plum," said Peterson. "It's a highly profitable company that has its hands very well around the reseller chan- nel." Agreed Conner: "Maynard will materially strengthen our ef- forts to market products through the retail and reseller chan- nel." Conner is coming off two quarters of sharply higher earn- ings after a year in which industry overcapacity and price wars dragged down profits. This article is copyright 1992 Investors Business Daily. Redis- tribution to other sites is not permitted except by arrangement with American Cybercasting Corporation. 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