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MAI Could Shut Tustin Factory, Memo Says : Drexel Suggests That Action Should Prime Takeover Bid Succeed

Times Staff Writer

A confidential memo prepared by the investment banking firm of Drexel Burnham Lambert suggests that MAI Basic Four Inc. would close its Orange County production operations should the Tustin firm succeed in its hostile takeover bid for Prime Computer Inc.

But a top MAI official said Thursday that the memo, which was filed in federal court in Boston as part of the legal proceedings surrounding the 4-month-old takeover battle, does not accurately reflect current plans for the combination proposed for the two companies.

“I can assure you, there are no plans to close that facility,” MAI President William Patton said of the Orange County plant in an interview. Drexel “never gave MAI Basic Four a copy of that memo. Thus, the viability of it to MAI management is without merit.”

1,100 at Complex

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MAI employs 1,100 people at its headquarters complex in Tustin. About 300 of those are production workers who assemble computers designed for business uses.

MAI launched a $1.3-billion unsolicited tender offer for Prime on Nov 15. Prime, a Natick, Mass., minicomputer maker, is more than three times the size of MAI in terms of revenue. MAI’s bid has been stalled in court.

The Drexel memo states that the merged company would carry the heaviest debt load in the computer industry, although it projects that the company could generate enough cash to pay off the debt. Drexel is acting as MAI’s financial adviser in its bid for Prime.

The 24-page memo is dated Nov. 7, 1988--one week before the takeover bid was announced. It was sent to Drexel’s “underwriting assistance committee” by Jonathan Sokoloff, managing director of the Drexel Beverly Hills office, and several other Drexel employees.

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Drexel has agreed to arrange most of the financing for the proposed merger by issuing $875 million in high-yield securities, known as junk bonds.

The memo describes the proposed transaction and contains financial results estimates for the combined companies. Throughout the memo, MAI is referred to as “Basic” and Prime as “Choice.” The takeover deal is called “Project Basic Choice.”

The memo states that the information it contains is based on “projections supplied by Basic’s management . . . as well as the cost savings which management believes will be achieved after the transaction is completed.”

Details of Assumptions

One section of the memo describes in detail the assumptions underlying the projections for cost savings that could be achieved by consolidating the two companies’ operations:

“Personnel cuts will be implemented,” the memo states. “Additional savings will come from closing Basic’s Tustin, California, manufacturing plant and integrating manufacturing into the existing Choice plants in Puerto Rico and Ireland.”

Patton said Drexel never gave him a copy of the memo. A spokesman for New York financier Bennett S. LeBow, MAI’s chairman, said LeBow did not see the memo until Monday, after receiving inquiries from The Times. LeBow declined to comment.

Sokoloff described the memo as “a very sensitive confidential internal document.”

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Drexel prepares such memos in all its major financing deals, Sokoloff said. The memos are for internal use and are not shown to clients, he said.

‘Deals Are Dynamic’

Sokoloff said the contents of such memos are sometimes revised, but he declined to say whether Drexel had changed its mind about whether the Tustin manufacturing operation should be closed.

“Certain facts may change over time,” he said. “These deals are dynamic.”

Patton denied that MAI plans to cease the manufacturing operations in Tustin should it acquire Prime, but he stopped short of stating that no changes would be made. “We can all speculate that when two companies are combined, there are potential areas of synergy,” he said.

He said the combined company might realize tax savings and other cost reductions by moving its production operations from Tustin to Prime plants in Puerto Rico and Ireland, as the memo suggests. “But that doesn’t mean that is a foregone conclusion,” Patton said. “It does not mean that Tustin manufacturing would be closed.”

The Drexel memo states that other cost reductions could be realized by combining positions that involve finance, information systems, human resources, legal and other executive functions. It also proposes an unspecified number of cuts in field engineering and sales management staffing.

Such consolidations, the memo says, would generate annual cost savings of $30 million in 1989, and they would increase to $60 million by 1991. The memo estimates the combined firm would generate $2.2 billion in annual revenue.

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The debt load of the merged company would be nearly $1.7 billion, or 94% of its total capitalization. The combined firm would, the memo states, be “by far the most leveraged of the major computer companies.”

MAI would be assuming that debt burden at what could be an inopportune time. The computer industry is beginning to experience a slowdown, and minicomputer makers in particular have been hurt by slumping sales.

Nevertheless, the memo estimates that the merged company would generate $126 million of cash to apply toward debt during its first year of operation, and a total of $577 million during the first 5 years.

Assuming the projections are correct, that much cash would be more than enough for MAI to meet the principal and interest payments on the money it would borrow to finance the deal, the memo says.

Melanie McCrossen, a technology analyst at Standard & Poor’s, said that most large computer companies carry very little debt. “The reason these companies have low debt,” McCrossen said, “is because the business risk of a technology company is fairly substantial. Computer companies--though not necessarily Prime--can go into the red so quickly.”

About 68.5% of Prime’s common stock had been tendered to MAI’s offer as of March 17. However, a federal judge in Boston has blocked the offer on the grounds that Drexel’s disclosures about financing arrangements for the deal have been inadequate.

The judge also said that MAI may be violating federal margin requirements that limit the amount of stock that can be pledged as collateral in a takeover. MAI has appealed the ruling to a federal appellate court; a decision is expected soon.

MAI has said it plans to launch a proxy fight at Prime’s annual shareholders’ meeting in May to replace Prime’s directors with some of its own choosing.


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