Return to Profitability Possible : Settlement May Be Tandon Cure

Last week’s out-of-court settlement of Tandon Corp.’s claim that Sony pirated its disk-drive technology did not seem to have much impact at first. The settlement only involved one kind of drive, a variety not yet widely used, and did little for the Chatsworth company’s stock.

But industry analysts said they believe the settlement is more important than that. They call it a signal that Mitsubishi and TEAC, two other big Japanese companies that Tandon accuses of infringing on disk-drive patents, may settle as well.

If not, analysts said, Tandon is likely to win its case against the companies before the U.S. International Trade Commission.

Either outcome probably would force other Japanese producers--there are perhaps two dozen--to pay Tandon for using its patent or to get out of the business, the analysts said. That would leave Tandon with higher disk-drive prices and, possibly, help it return to profitability.

Pirating Alleged

If all the companies agreed to pay, it could also mean one-time payments to Tandon totaling up to $50 million, according to estimates by one analyst, David Moy of Morgan Stanley.

In a federal lawsuit in Los Angeles and in charges before the ITC in Washington, Tandon accused Sony, TEAC and Mitsubishi of pirating its patented technology for double-sided floppy-disk drives, which store and retrieve data on magnetic disks.

Tandon settled with Sony for an undisclosed sum that will include royalties, and also got an option to use Sony technology for high-capacity, 3 1/2-inch double-sided drives. But its litigation against the other two defendants remains in force, and could be more important, at least in the short term, analysts said. That is because Mitsubishi and TEAC make larger drives, which make up about 90% of the market.

The ITC is expected to rule on Tandon’s complaint by the end of the year.

At stake is a $3.7-billion-a-year market that Tandon once led. About 18 million drives were sold in 1984, about 70% of them made by Japanese firms, according to Jim Porter, who publishes Disk/Trend Report.

Estimates of how much victory would be worth to Tandon vary widely. Porter, described by one Wall Street computer analyst as “like a guru for all of us,” predicted that, if Tandon wins or settles with TEAC and Mitsubishi and gets most of the other Japanese producers to sign up too, it could mean $40 million to $50 million a year in additional revenue.

“After you pay the lawyers it’s all profit,” he said.

But he cautioned that it is very difficult to predict whether Tandon will get enough in royalties per drive to reach the $50-million yearly figure, and Wall Street analysts were more conservative.

“I felt Tandon will get $7 million to $8 million in after-tax profit if everybody settled,” said Bob Grandhi of E.F. Hutton.

But that’s only one part of the effect should Tandon win or settle. The other is the likely price increase. “The stuff Tandon ships goes out at a reasonable price,” said Michael Murphy, editor of the California Technology Stock Letter. Industry analysts say disk-drive prices, in fact, are now far too low.

Breaking Even

Murphy noted that Tandon is roughly breaking even on an operating basis, but is posting losses because of inventory write-downs. The company has lost money for the past three quarters, including a loss of $19.9 million, or 39 cents a share, on sales of $61.1 million for the quarter ended March 29.

Besides slumping computer sales, Tandon’s biggest problem has been the influx of cheap disk drives from Japan. Analysts said Tandon, which manufactures in Asia, is now the low-cost producer. But, because it is the only major producer that depends mostly on disk drives for income, it suffers the most in a price war. And a price war is under way, the analysts said.

“The Japanese companies are selling at a loss now,” Porter said. “They’re all trying to buy in with market share.”