Computer Automation Stock Climbs Wall of Expectation on IBM Licensing Agreement
The handful of shareholders who attended Computer Automation’s (CAUT-OTC) annual meeting last Tuesday seemed to have one thing on their mind: the hush-hush patent cross-licensing agreement between the small Irvine company and giant IBM Corp.
But Computer Automation officials, who have been tight-lipped about the IBM deal in the nine months since it was announced, didn’t start wagging their tongues last week.
The patent in question involves a key technology incorporated in IBM’s new personal computer line, dubbed the Personal System/2.
Michael Murphy, editor of a San Francisco-based technology newsletter, has been recommending purchase of Computer Automation’s stock for months. Murphy’s enthusiasm is based on the belief that companies that want to produce legal copies of the IBM models will have to license the technology from the Irvine firm.
Because scores of companies are already rushing to duplicate the IBM machines, Murphy reasons, Computer Automation soon may be rolling in royalty checks.
Murphy predicted in the Dec. 4 issue of his California Technology Stock Letter that Computer Automation by early February will announce the signing of its first patent licensing deal with a maker of IBM clones or add-on hardware.
Presuming that happens, “there could be a real scramble to buy this stock,” Murphy wrote. The analyst sees the stock moving to $20 a share after such an announcement.
Computer Automation’s stock closed Friday at $8.125, a gain of 33% over its week-earlier close of $6.125. The over-the-counter stock has traded as high as $17 during the past year.
At last week’s meeting, a shareholder pressed Chairman George Pratt to provide a “what-if” scenario for future royalty receipts. But Pratt said such speculation would be “inappropriate.”
Pratt did acknowledge “preliminary discussions with third parties” involving the patent. According to Murphy, those companies include personal computer makers AST Research of Irvine and Compaq Computer of Houston.
“We’ve approached a number of companies producing products that, if designed to IBM specifications, would mostly likely infringe the (IBM and Computer Automation) patents,” company President Douglas L. Cutsforth said after the shareholders’ meeting.
Cutsforth also said that the type of companies most likely to be interested in signing a patent licensing agreement would be firms that make boards to expand the memory of the IBM models. Two Orange County companies, AST Research and Western Digital, are leading makers of such products.
Computer Automation can’t say much about the patent deal because it signed a non-disclosure agreement with IBM that remains in effect through 1991, Pratt said. The accord prohibits the Irvine firm from discussing, among other things, the royalty rates it receives from IBM.
Computer Automation, a maker of computer test equipment, can report gross royalty receipts, however. It said it has already received a $100,000 check from IBM, with more due in March.
The patented technology was developed by Computer Automation engineers in 1973. IBM researchers developed similar technology when working on the new PS/2 line. IBM later learned of the Computer Automation patent and decided to cross-license the technology.
A key feature of the new IBM models is that their memory can be expanded and printers and other devices added without disassembling the machine and installing a switch to make all the parts work properly.
The Computer Automation technology is what gives the IBM models that capability. IBM’s earlier PC models had to be taken apart if one wanted to add a memory board--a hassle most people would rather not have.
Computer Automation officials admit that there is no guarantee that would-be cloners of the IBM machines will see a need to license the technology from Computer Automation. But they are betting that companies will follow the lead of IBM, whose high-powered lawyers evidently decided that a license was necessary to stay on safe legal ground.
