Fading Memories : Demise of a Disk-Drive Maker Illustrates : Peril of Dependence on a Single Customer
Less than two years ago, Computer Memories enjoyed a coveted contract to supply mighty IBM with about $100 million worth of its computer disk drives.
But Computer Memories withered away in a hurry. The company went from one of the nation’s largest makers of computer disk drives, with 1,600 employees, to little more than a corporate shell with two dozen employees. And last Friday it announced it would merge with another company in a move that will end Computer Memories’ seven-year existence.
Computer Memories ultimately failed because it committed the mistake of relying too heavily on one customer. It turned out that what IBM 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 merging with Hemdale Film Corp., a Los Angeles entertainment company that bankrolled such successful films as “Platoon” and “The Terminator.”
In the often staid business of making Winchester disk drives, the shoe-box-sized personal computer devices that read and write data, Computer Memories and its chairman, Irwin Rubin, 59, were colorful and dramatic exceptions.
Computer Memories was disliked by competitors, who accused it of making faulty products and infringing on patents. Last year one rival happily dumped $1 million worth of Computer Memories disk drives into the Atlantic Ocean. The man who did it, Core International President Hal Prewitt, solicited Computer Memories trade-ins by selling customers his company’s replacement disk drives, a $1,000 rebate and a chance to help build “the world’s first low-technology reef.”
Last April, “PC Magazine,” a trade publication, published an article detailing problems in which users of IBM’s PC AT personal computers lost data, allegedly because of 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’ drive 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 one month on the job.
The reason Hemdale is merging with Computer Memories is to go public without having to go through the trouble of reorganizing itself, paying extensive legal fees or submitting extensive filings to the Securities and Exchange Commission. Hemdale also gets the $29.4 million in cash that Computer Memories had accumulated, or about the same amount Hemdale executives believe it could have raised in a public offering.
Although Hemdale’s assets are technically being acquired by Computer Memories, Hemdale is the survivor, and will own 80% of the merged company’s shares. Hemdale is owned by John Daly, 49, a British-born film financier whose projects included promoting the 1974 Muhammad Ali-George Foreman heavyweight championship fight in Zaire.
Computer Memories, which had $116 million in sales in the fiscal year ended March 31, 1986, stopped making disk drives last summer. The company auctioned off its remaining assets and began looking either for an acquisition or a buyer for the company. About 25 people are still employed by the company, doing repair work on disk drives.
Computer Memories’ chief executive Rubin will not be an officer with Hemdale. Under the terms of his management contract, however, Rubin will continue to receive $185,000 a year until January, 1989.
Rubin said the Hemdale deal was one of two considered--he wouldn’t disclose the other. Had the deal been done earlier, Hemdale might have enjoyed some of the $15 million in tax benefits that Computer Memories had accumulated. That can’t happen now because of changes in the new tax laws, 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 merger. Intel will sell its 1.7 million Computer Memories shares, once worth about $50 million, to Hemdale for $4.7 million, or $2.75 a share.
Computer Memories never recovered from the crippling blow delivered by IBM. 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 was too dependent on IBM, something that Rubin once said 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 thought to be a routine meeting. In less than one hour, they told Computer Memories they would stop buying its drives after the end of the year.
IBM, a notoriously close-mouthed company, never said why it cut Computer Memories off, although some industry analysts said Computer Memories couldn’t build drives fast enough. In addition, IBM was widely criticized for using the Computer Memories drive, which some users said inadvertently destroyed their data.
James Porter, president of Disk/Trend Inc., an industry consulting firm in Los Altos, said he believes the criticism was largely unfair. Problems with the original IBM AT, he said, were due to software and a faulty chip. He believes 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 in favor of a patent infringement suit Quantum Corp. had filed against Computer Memories. The company eventually settled the suit by paying Quantum $6 million.
Seeking to re-establish the company’s credibility after the IBM decision and the Quantum law 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 that he believed would help the company recover by making acquisitions and developing new products. Directors balked because, Rubin said, there was no guarantee the plan would work. Conner promptly resigned.
By last June, the company decided to stop making disk drives and to sell most of its assets. In what amounted to a high-tech garage sale, some 100 people jammed a room at the company’s Chatsworth headquarters in early September for an auction. They bid on welding tools, cabinets, personal computers, chairs and an eight-foot-long mahogany conference table that directors used for their meetings.
“When IBM went away, their product line was out of date,” Porter said. “You can’t sell nothing, and they had nothing. I would say he did a gentlemanly job of closing the joint down.”
Despite the turmoil brought on being too dependent on IBM, Rubin expresses no regrets.
“If I had to do it again, I probably would do it again, because how can you turn down a contract that says it’s going to give you $100 million in business? There are companies in business for 15 to 20 years that have never done $100 million in business,” he said.
COMPUTER MEMORIES AT A GLANCE Computer Memories, based in Chatsworth, was a manufacturer of computer disk drives. The company has since liquidated most of its assets and will be merged with Hemdale Film Corp. Computer Memories has 1.1 million shares of common stock outstanding.
