Computer Memories’ Link to IBM a Mixed Blessing : Disk Drive Maker Finds Profits Can Be Elusive
Irwin Rubin, chairman of Chatsworth-based Computer Memories Inc., comes across as a tough, self-assured businessman, an image bolstered by his husky frame and gravelly voice. When Rubin discusses his disk drive company’s heavy dependence on orders from computer giant IBM, however, he sounds more like a Nervous Nellie than a man of machismo.
“It makes you uneasy every day of the week,” Rubin said. “It makes it difficult to sleep.”
Rubin has reason to be edgy. Chiefly on the strength of orders from International Business Machines, his company’s sales soared nearly sevenfold over the last two years to $108.7 million during its most recent fiscal year, which ended March 31.
But Computer Memories has yet to benefit much from that growth, and it is not clear whether the company will. Plagued by production foul-ups and other problems while scrambling to fill orders for the IBM PC AT computer, Computer Memories absorbed a whopping loss of $8.9 million during its third quarter ended Dec. 31 and a loss of $3.8 million for the year.
Some analysts viewed the fourth-quarter profit of $2.6 million that Computer Memories reported two weeks ago as a possible sign of recovery. But Computer Memories will have to succeed over the long run where many others have failed to establish a secure foothold in the volatile disk drive business.
Even though Rubin believes that Computer Memories’ production hang-ups are history, he acknowledges that he will have little peace unless his company ensures its future by broadening its customer base. Rubin said he knows that he can’t depend on IBM’s business forever. He and analysts note that IBM has occasionally turned its back on suppliers that it once embraced.
The competition isn’t resting comfortably, either. U.S. disk drive manufacturers have suffered from poor management, intense domestic and Japanese competition, cost cutting and a slowdown in the computer industry. Many small companies are closing or being acquired, and the big ones are tightening their belts.
On top of that, Computer Memories is hardly the only company in the business whose fortunes swing with the whims of IBM. Chatsworth-based Tandon Corp. has lost money for three consecutive quarters, in part because IBM canceled orders.
If Rubin, 57, navigates Computer Memories to safer ground, it won’t be his first business coup. He rose from humble origins to become a millionaire entrepreneur.
The son of a Polish-born tailor, Rubin got his start in equipment manufacturing at 15, working as a machinist for a microphone manufacturer in Chicago. He got his bachelor’s degree in management from the University of Illinois in 1950 and was transferred to Los Angeles in 1958 by an electronics company that now is a unit of Gould Inc.
In 1980, Rubin was approached about investing in Computer Memories, a floppy disk drive business that was founded the year before by engineers Abraham Brand and Raymond Brooke.
“I didn’t know a disk drive from a line drive when they came to see me,” Rubin said.
Non-Competitive Niche
Even so, Rubin quickly made his mark on the business. He established the company’s pattern of finding relatively non-competitive niches in what is generally a hotly competitive industry.
The company started that way, Rubin said, when he discovered that 42 floppy disk drive manufacturers already were in production when Brand and Brooke came to him with their idea. Rubin persuaded them to duck the competition by making higher-capacity, rigid disk drives instead.
Disk drives, the computer components with magnetic heads that store and retrieve information, fall into two groups. Floppy disk drives read data from, and store data on, inserted disks. Rigid disk drives, which tend to be faster and capable of storing more information, use disks that are sealed inside the component.
Ready for IBM
When IBM began looking for a rigid disk drive manufacturer for its powerful new AT personal computer, Computer Memories was one of the few manufacturers that was ready to supply the 20-megabyte drive it needed. (A 20-megabyte drive can store as much as 20 million bytes, the basic units of computer memory.)
Computer Memories may have been desperate to cut its deal with IBM in 1983. Thomas Rooney, an analyst with Donaldson Lufkin Jenrette, said Computer Memories was “on the ropes” and was willing to “submit to IBM’s price pressure.”
The IBM deal failed to provide quick dividends. In fact, the torrent of orders from IBM almost choked Computer Memories.
“They just couldn’t get production up without quality problems,” Rooney said.
Executives said the problems at the company’s two plants in Singapore and Chatsworth reflected the headaches that disk drive manufacturers typically have when they begin manufacturing a new product. They say the situation was aggravated by the complexity of the drive for the AT computer.
Computer Memories was helped out of an apparent financial squeeze when IBM lent the company $6 million five months ago. Meanwhile, time and management attention boosted the percentage of drives that came off the production line fit to sell from 25% in June, 1984, to 85% by March.
Analysts, however, said Computer Memories may have fumbled away a lucrative opportunity because, when the company was having problems, IBM began looking elsewhere for disk drives. IBM started making some of the disk drives itself and reached an agreement to buy more from Seagate Technology.
“If IBM produces disk drives in volume and if Seagate comes up with a more attractive price, a year from now Computer Memories may find that business going away, and what do they do for an encore?” Rooney said.
Potentially Costly Lawsuits
Other questions hang over the company’s head as well. Computer Memories faces potentially costly lawsuits from a shareholder and Quantum Corp., which accuses the company of having infringed on a patent.
The company also has been wracked by turnover in senior management. Brooke, one of the founders, resigned as president soon after the company scrapped its four-member executive committee in late 1983. At the time, authority was concentrated in the hands of Rubin, who already held the titles of chairman and chief executive.
Brand, the other founder, succeeded Brooke but quit last month after only 11 months as president.
“It’s been a revolving door,” Rooney said. “That’s not a real good sign.”
Analysts added, however, that Computer Memories may finally have the sort of president and chief operating officer it needs. They maintain that Rubin, whose forte is salesmanship, has long needed to be teamed with an executive who can run the manufacturing operations smoothly.
The company’s new president, 39-year-old Gary Streuter, carries those sorts of credentials. Streuter, who was vice president for manufacturing at Altos Computer Systems, joined Computer Memories as a consultant last October to correct the company’s production problems and received much of the credit for accomplishing the job.
Steven L. Ossad, an analyst with L. F. Rothschild, Unterberg, Towbin, said the arrival of Streuter, along with the apparent correction of Computer Memories’ production problems and the shakeout of some competitors, bodes well for the company.
Ossad added, however, that Computer Memories “could slip again,” noting that reliance on IBM orders has been “a kiss of death” for other equipment companies. In addition to Tandon, Miniscribe and Seagate Technology have suffered when IBM has cut back on orders.
The price of Computer Memories’ stock reflects investor concerns about the company and the entire computer industry. The stock, which hit a high of $35.50 a share in May, 1983, has recently hovered at slightly below $5, close to where it stood before the company announced its fourth-quarter profit two weeks ago. Monday’s closing price was $4.25.
Rubin is Computer Memories’ second-largest shareholder. He turned his original investment of $200,000 into a stake of 535,468 shares, or 5%, now worth about $2.3 million. Computer Memories’ largest shareholder, Santa Clara, Calif.-based Intel Corp., holds a 17% stake.
For his part, Rubin is devoting much attention to developing business for two new disk drive models. He is also stepping up Computer Memories’ efforts to persuade computer manufacturers besides IBM to buy its products.
These steps reflect Rubin’s efforts both to find lucrative markets and to wean the company from its heavy dependence on IBM, which is expected to account for 70% of its business this quarter.
IBM’s business is “a blessing and a curse” for Computer Memories, Rubin said.
“It’s a blessing in that it’s large and it makes you look like a massive company. It’s a curse in that you can lose it and be out of business.”
