Ripe Potential for Mergers, Acquisitions : Valley Becoming a Bargain Basement for High-Tech Industry
The San Fernando Valley area is turning into a bargain basement for buyers of technology companies.
Spurned by the investment community and crippled by stiff competition, many of the area’s small computer and electronics equipment firms have put themselves up for sale at prices that are a far cry from what the companies would have fetched two years ago.
Some analysts have begun to see acquisition possibilities as well among the biggest local high-tech companies--including Dataproducts and Computer Memories--partly because of declining stock prices and soft business.
“There’s the potential for a tremendous amount of merger and acquisition activity,” said Merrill Lynch analyst Richard Hastings. “Many companies will have to find partners or bow out of the business altogether.”
Bids to Avoid Bankruptcy
In some cases, small companies looking for buyers simply are trying to find partners with the financial, technical and marketing muscle to help them grow faster. More often, however, prospective sellers are desperately trying to keep their businesses out of bankruptcy.
“A lot of them will be picked up, and a lot will just go away,” said Martin J. Salvin, president of Westlake Village-based Bishop Graphics, which has been looking at acquisition candidates and recently called off plans to buy PerfectData Corp. of Chatsworth.
The urge by computer and electronics equipment companies to sell out hardly is unique to the Valley area, where acquisitions so far have taken only a sprinkling of the thick population of high-tech businesses.
Bernard Goldstein, an investment banker who specializes in software and data processing company acquisitions, called firms in those fields “the most acquisition-prone in the United States, with the possible exception of commercial banks.”
” . . . This is a new industry,” he said, “and the process of consolidation is not uncommon in new industries.”
Acquisitions on Rise
According to statistics compiled by Goldstein’s firm, Broadview Associates of Fort Lee, N.J., in the first half of 1985 there were 82 acquisitions nationwide in the software and data processing fields worth $846 million, a record for the six-month period. That was up from 55 transactions worth $598 million in the same period last year.
The market value of most technology companies, however, has fallen dramatically over the last two years. Hambrecht & Quist’s growth stock index, which tracks about 100 technology companies with annual revenue below $200 million, has declined about 50% since hitting its peak in June, 1983.
Values placed on privately held technology companies locally and elsewhere have dropped even further, industry experts say.
Prospective buyers of high-tech companies tend to be large, financially strong concerns that want to move into new businesses or acquire new product lines and marketing channels.
In the Valley area, there appears to be far more potential sellers than buyers. The area is dotted with small technology companies that were founded two or three years ago when financing was readily available, but which now are starved for capital.
Overcrowded Markets
The bigger companies that are acquisition possibilities generally are in overcrowded markets where only the strongest appear destined to survive. Many make disk drives, printers and other computer equipment that face rugged competition from price-cutting manufacturers in the Far East.
Analysts said management problems, however, helped prompt the takeover of the only big, publicly held technology firm in the area to be acquired recently. The company, Informatics General of Woodland Hills, was bought last month for approximately $130 million, or $27 a share, by Sterling Software of Dallas in the software industry’s largest hostile takeover ever.
Informatics became a takeover target, analysts said, because it had good products and a stock price that was depressed by the lack of strong business strategy. Informatics stock, which hit a high of $34 in 1983, was trading at $17 to $19 before the takeover battle began in April and drove the stock price up.
Hostile Takeover Problems
Although interest in hostile takeovers of high-tech industries is rising, such takeovers are likely to remain rare for some time, analysts say. This is the case, they say, because senior management and top technical experts often are the most important assets of a technology company, and these people tend to leave after a hostile takeover.
Analysts view Woodland Hills-based Dataproducts, the nation’s largest independent manufacturer of computer printers, as perhaps the most likely acquisition candidate among the larger local high-tech firms. Its stock, which reached a high of $31.38 in the halcyon days for technology investments two years ago, closed Friday at $12.75.
They said that Dataproducts, which lost $19.4 million in the quarter ended June 29, might be a good buy for a large company looking to diversify into the printer business because of Dataproducts’ sizable market share and good business relationships with computer manufacturers.
Thomas Rooney, an analyst with Donaldson Lufkin & Jenrette in New York, said the company is also attractive because of its real estate holdings, strong cash flow and little need to spend money on buying new products, plants or equipment.
In addition, analysts say that Dataproducts Chairman Graham Tyson may not want to run the company much longer and for that reason might welcome a buyer. Tyson, who founded the company 23 years ago, returned to day-to-day management in April when Charles A. Dickinson resigned as president and chief executive.
Differing Opinions
Analysts are divided on the prospects for a buy-out of disk drive companies such as Computer Memories or Tandon, which are based in Chatsworth. Many say the disk drive business is changing too quickly and is too saturated with competitors to attract many buyers.
On the other hand, industry experts note, the depressed stock prices might entice computer system manufacturers or diversified electronics companies that would like to build or sell their own line of disk drives.
Tandon’s stock, which closed Friday at $4.25, peaked at $34.25 two years ago. About the same time, Computer Memories stock, which closed at $3.13 Friday, reached $30.25.
Speculation has heated up about the likelihood of an acquisition of Computer Memories since the company disclosed on Aug. 12 that at year-end it would lose its contract with IBM. The computer giant’s orders accounted for 81% of Computer Memories’ sales during the quarter ended June 30.
Speculation on Buyer
One possible buyer is Intel Corp. of Santa Clara, which already is the largest Computer Memories shareholder and has an option that extends until May, 1987, to buy a controlling interest of 33.4%.
G. Wendell Birkhofer, a Beverly Hills investment broker who follows Computer Memories, speculated that Intel might act soon because of the current low price of Computer Memories stock.
Birkhofer also raised the possibility of a hostile takeover of Computer Memories. He said a raider might be attracted by the fact that the company’s stock is selling at a price far below the per-share value of its assets.
He estimated that at the end of the year, Computer Memories would have the equivalent of $5 a share in cash and assets, all of which could easily be converted to cash. Birkhofer said the company actually might be worth substantially more if the value of its property and technology is taken into account.
Tandon, a much bigger company that has lost money for four consecutive quarters, would have a harder time attracting buyers, analysts said. But Michael Murphy, editor of the California Technology Stock Letter, said Tandon’s ample supply of cash gives it enough financial muscle to go out and acquire companies itself.
He said Tandon probably will try to acquire new product lines as part of an effort to diversify away from its hard-hit floppy-disk drive business.
Prospects for Acquisitions
Murphy noted that cash-rich concerns such as Tandon can take advantage of the depressed values of technology companies by making acquisitions now. For similar reasons, Murphy said, Micom Systems, a Simi Valley-based maker of data communications equipment, is likely to continue its string of acquisitions.
Two other publicly held companies mentioned by analysts as potential acquisition candidates are Protocol Computers of Woodland Hills, which makes computer communications equipment, and PerfectData, a maker of computer maintenance supplies and floppy disks, whose agreement to be bought by Bishop Graphics fell apart in August.
Most of the corporate buying and selling, however, has involved small, privately held companies. Most acquisitions are prompted by financial difficulties, and small companies simply lack the resources to sustain a long slump.
Among the small high-tech companies in the Valley acquired in 1984 and 1985 are: Anadex, a Camarillo computer printer company; FutureNet, a Chatsworth software and computer peripheral firm; Micro Bond Technologies, a Canoga Park circuit-board maker; Advanced Matrix Technology, a Newbury Park computer printer manufacturer, and Image Resource, a Westlake Village computer graphics firm.
Several other companies, such as Corona Data Systems, a Thousand Oaks computer maker, and Soft-Kat, a Van Nuys software firm, recently sold large but not necessarily controlling interests to outside investors. These transactions typically enable the companies to secure fresh financing without giving up complete control.
Executives of most of the acquired companies said their businesses have benefited from the deals.
Bruce Gladstone, president of FutureNet, said he sold out to Data I/O of Redmond, Wash., in November to speed his company’s growth. Gladstone said the deal has worked, chiefly because FutureNet can now use its parent company’s larger sales force to sell its own products.
Needed Boosts
Advanced Matrix Technology benefited more dramatically after selling out a majority interest to the Lam Soon Group, a Singapore industrial company, last November. Joseph E. Eichberger, chairman and chief executive of Advanced Matrix, said Lam Soon provided the help needed to transform his business from a fledgling product development enterprise into a vital manufacturing concern.
First, Eichberger said, Lam Soon provided the money that Advanced Matrix needed to begin manufacturing its printers. Second, Lam Soon set up the overseas manufacturing operation that Advanced Matrix executives believed they needed to keep their costs in line with their competitors.
“We couldn’t have done it on our own,” he said.
Eichberger conceded, however, that his company might have commanded a higher price when technology companies were in vogue two and three years ago.
“Clearly, the market value of companies such as ours go up and down,” he said.
But he added, “Start-up companies that are still in need of funding don’t have the luxury of sitting out and waiting for the right market.”
Even under the best circumstances, however, entrepreneurs generally are loath to sell their companies, said Thomas W. Turney, an investment banker in Los Angeles for Hambrecht & Quist.
“An entrepreneur by definition wants to grow his own company,” Turney said. “Suddenly, to make his business a division of another company isn’t consistent with his goals.”
