Disk-Drive Maker Put Its Eggs in One Basket--and Fell : Computer Memories Being Gobbled Up by Hemdale Film
Less than two years ago, Computer Memories enjoyed a coveted contract to supply mighty IBM with about $100 million of its computer equipment.
But Computer Memories withered away in a hurry. The company has gone from being one of the nation’s largest makers of disk drives, with 1,600 employees, to little more than a corporate shell with two dozen staffers. And last Friday, Computer Memories announced plans for a merger that will, in effect, mean the end for the 7-year-old Chatsworth company.
Computer Memories ultimately failed, executives say, because it committed the mistake of relying too heavily on one customer. It turned out that what International Business Machines gave, it could also take away. When IBM canceled its contract with Computer Memories, the disk-drive maker was never able to recover.
Now, Computer Memories is being gobbled up by a Los Angeles entertainment company, Hemdale Film Corp., the bankroller of such successful films as “Platoon” and “The Terminator.” In the often staid business of making Winchester disk drives, the shoebox-sized personal computer devices that read and write data, Computer Memories and its chairman, Irwin Rubin, 59, were colorful exceptions.
Computer Memories, which had sales of $116 million in the fiscal year that ended last March 31, was disliked by competitors, who accused it of making faulty products and infringing on patents. Last year one rival dumped $1 million of Computer Memories disk drives into the Atlantic Ocean a mile off the Florida coast. The man who did it, Harold Prewitt, president of Core International, solicited Computer Memories trade-ins by offering customers $1,000 rebates on every replacement drive they bought from his company along with a chance to help build “the world’s first low-technology reef.”
Last April, PC magazine, a trade publication, published an 11-page article detailing problems that users had losing data when they worked on IBM PC-AT computers equipped with the Computer Memories disk drive. The story concluded that the drive “is surer to lead you and your data down the primrose path to destruction than anything since Nero and his fiddle.”
Unpredictability turned out to be Computer Memories’ legacy. When IBM decided in August, 1985, to stop buying Computer Memories’ equipment for the IBM PC-AT, Computer Memories lost 80% of its sales. If that wasn’t bad enough, the executive brought in to salvage the company in the wake of the IBM debacle, Finis Conner, quit after less than a month on the job.
By merging with Computer Memories, Hemdale can go public without reorganizing itself, paying extensive legal fees, or submitting extensive filings to the Securities and Exchange Commission. The transaction will be a so-called reverse merger, an increasingly common type of transaction in which a private firm acquires a publicly traded shell company so that it can become public itself. Hemdale will also get the $29.4 million in cash that Computer Memories had accumulated, or about the same amount Hemdale executives say the company could have raised in a public offering.
Hemdale will be the surviving firm by virtue of the fact that its current owner, John Daly, is getting 80% of the merged company’s shares. Daly, 49, is a British-born film financier who also helped promote the 1974 Muhammad Ali-George Foreman heavyweight championship fight in Zaire.
Computer Memories’ chief executive, Rubin, will not be an officer with Hemdale, and it is uncertain whether he will be on the board of directors. Under his management contract, however, Rubin will continue to receive $185,000 a year through January, 1989.
Rubin said the Hemdale deal was one of two considered; he declined to disclose the other. Had the deal been carried through earlier, Hemdale might have enjoyed some of the $15 million in tax benefits that Computer Memories accumulated. That can’t happen now because of tax law changes, Daly said.
Computer Memories shareholders must approve the merger, but little opposition is expected. The company’s two largest shareholders, Intel Corp., the $1.2-billion Santa Clara semiconductor firm, and an investment group led by Beverly Hills stockbroker Bertram Cohen, have endorsed the deal. Intel will sell its 1.7 million shares to Computer Memories, once worth about $50 million, to Hemdale for $4.7 million, or $2.75 a share.
At its peak, the IBM contract boosted Computer Memories’ earnings to $4.8 million in the quarter ended June 30, 1985, on sales of $50.5 million. But the company’s dependence on IBM was so great that Rubin once said it made it difficult for him to sleep at night.
Rubin had cause to worry. In early August, 1985, IBM executives visited Computer Memories for what was expected to be a routine meeting. In less than an hour, however, the IBM officials told Computer Memories executives that they would stop buying their drives after the end of the year.
IBM never said why it cut off Computer Memories, although some industry analysts said that Computer Memories could not build drives fast enough. In addition, IBM was widely criticized for using the Computer Memories drive by computer users who said the component inadvertently destroyed their data.
James Porter, president of Disk/Trend Inc., an industry consulting firm in Los Altos, said he believes that the criticism was largely unfair. Problems with the original IBM-AT, he said, were due to problems with the software and a faulty chip. He believes that IBM got the products it wanted from Computer Memories and “tossed it aside like a limp rag.”
Two weeks after the IBM decision, Computer Memories suffered another blow when the U.S. Patent and Trademark Office issued a ruling that bolstered Quantum Corp.'s patent infringement suit against Computer Memories. It eventually settled the suit by paying Quantum $6 million.
Seeking to re-establish the company’s credibility after the IBM decision and the Quantum suit, Rubin recruited Conner, a highly touted executive who was one of the key executives in building Seagate Technology, a Scotts Valley firm that has been one of the nation’s most successful disk-drive makers.
Three weeks after he was hired, Conner presented a $20-million plan to the company’s directors calling for acquisitions and the development of new products. But directors balked, Rubin said, because there was no guarantee that the plan would work. Conner promptly resigned.