Why ‘Dr. Fix-It’ of High-Tech Firms Failed to Save MiniScribe

Quentin Thomas Wiles used to be known as “Dr. Fix-It” because of his successful rescues of sick high-technology companies. The Sherman Oaks resident was roving trouble-shooter for the San Francisco investment firm Hambrecht & Quist, which made a reputation for investing in near-bankrupt or start-up high-tech firms.

In 1985 he was sent in to turn things around at MiniScribe, a Longmont, Colo., maker of disk drives that store and retrieve data for computers. Wiles, now 70, went to MiniScribe determined “to show them one last time that he was the best there is,” said William Hambrecht, president of Hambrecht & Quist and a MiniScribe director.

For a while, Wiles’ magic seemed to work. MiniScribe reported that its sales soared to $603 million in 1988 from $115 million in 1985. Meanwhile, it went from a loss of $16.8 million to a profit of $25.8 million.

But today, Hambrecht calls MiniScribe “a Greek tragedy.” Steven Sidener, a San Francisco attorney who represents a shareholders group suing MiniScribe, Wiles and Hambrecht & Quist for securities violations, describes what happened at MiniScribe as “an outrageous fraud.”

According to a report issued by MiniScribe’s new management, previous senior management was under so much pressure from Wiles to maintain the company’s turnaround that it took part in “a massive fraud” to inflate the company’s reported sales and earnings for the last three years. Things were so out of control, the report says, that at one point bricks were packaged as finished disk drives and sent off to customers to temporarily boost sales and inventory numbers.

Critics add that Wiles also was seldom present at the company and his product diversification strategies backfired.

The report, which has been given to the Securities and Exchange Commission’s enforcement division, doesn’t specifically accuse Wiles of fraud. But it offers a stinging indictment of his management. Not surprisingly, MiniScribe’s stock has collapsed, from a high of $13.75 per share in 1988 to $1.625 at Monday’s close on over-the-counter trading.

Wiles, who has denied any knowledge of the fraud, quit as MiniScribe chairman and Hambrecht & Quist vice chairman in February.

Since then, he has dropped out of sight. “This has been quite a trauma for him,” said Wiles’ attorney, Cary Lerman. The phone at Wiles’ office on Ventura Boulevard has been disconnected, and his name has been removed from the office door.

Born in Nebraska

But for all of the problems at MiniScribe, the puzzling part is that Wiles employed many of the same techniques of management reorganization and cost-cutting there that he did at a dozen or more companies he successfully nursed back to health.

Wiles, who didn’t respond to requests for an interview, has been involved in turnarounds since the early 1960s. He was born in Weeping Water, Neb. After graduating from the University of Nebraska with degrees in mathematics and chemistry, he worked for electronic products maker Goodall-Electric Manufacturing in Ogallala, Neb., and eventually took control of the company.

When it was sold in 1960 to the Cleveland-based industrial conglomerate TRW, he went along and began his career as a trouble-shooter, turning around several ailing TRW companies. In 1970, he left and joined Hambrecht & Quist. Early on, William Hambrecht decided that Wiles “had a very special talent” for turning around disorganized companies.

His methods were often considered harsh but they usually worked. Wiles worked his magic at such companies as ADAC, a Milpitas, Calif.-based maker of medical equipment; Silicon General, a San Jose semiconductor maker; Rexon, a Manhattan Beach data storage business, and Granger Associates, a Santa Clara, Calif., telecommunications firm. All were either losing money or were marginally profitable when Wiles arrived.

‘Intuitive Sense’

“I’ve never met anyone who’s better at forcing organizational problems to the surface,” Hambrecht said. Wiles “had an intuitive sense of what the soft spots were.”

Under Wiles’ stewardship, for instance, ADAC went from a loss of $33 million in 1984 to $4.3 million in net income in 1987, and was recently named “turnaround of the year” by the Turnaround Management Assn. in Cary, N.C.

So what went wrong with Wiles at MiniScribe?

“I think MiniScribe got too big for his system,” said William (Dan) Rasdal, a former Granger executive. Rasdal, now president of Silicon General, noted that MiniScribe is five times bigger than other firms Wiles managed. “When you move into a company like Granger, it’s not too hard to break it down into pieces and make sure you’re on track,” Rasdal said.

MiniScribe’s internal report also indicates that Wiles lost control of the firm simply because he wasn’t there enough. Wiles wanted to spend more time at home and with his wife, who suffered a heart attack a few years ago, said Edmund H. Shea Jr., a Rexon director and executive vice president of J. F. Shea, a Walnut construction firm. Wiles visited the firm only once a quarter or less, MiniScribe officials say.

In contrast, during Wiles’ turnaround of Granger, he owned a home nearby and would visit the company about four days a week, Rasdal said.

Hambrecht says it’s now apparent that Wiles kept up the pressure of his crisis management techniques long after MiniScribe was in a turnaround phase. “This experience has reinforced for me that it’s important to separate the turnaround effort from the later ongoing management effort,” he said. “I think the intensity of effort that goes into a turnaround is either wasted or it distorts things later on.”

Cut Divisions

Hambrecht also said MiniScribe’s managers were guilty of hubris. “They were the darlings of the industry and Wall Street and they started believing their own press clippings,” he said. “They believed they were almost immune to cycles in the disk drive business. So when things did cycle down for them, they kept driving forward, assuming they’d be able to pull it out and continue to grow.”

In the past, Wiles whipped companies into shape using “Q. T.’s Disciplines,” a 12-point guide to management fundamentals, and “Q. T.’s Method of Operation,” an eight-point list for identifying problems and solutions.

He eliminated divisions such as production and finance and reorganized firms into small units, each of which was responsible for a product from start to finish. Division heads were held accountable for “making the numbers”--or meeting goals--at quarterly “dash” meetings. These meetings often became heated, with Wiles confronting managers who didn’t meet their goals.

At one such meeting at Granger, an unhappy Wiles kicked a manager’s written report out of the room. “Everyone at the time thought it was eccentric behavior,” Rasdal said. “But they got the point. It was his way of teaching.”

From his Sherman Oaks office, Wiles kept track of his firms through color-coded folders and stayed in touch by phone and fax. He often made drastic cuts at companies, laying off workers and trimming operations.

Compounding the problem at MiniScribe, Hambrecht suggested, was that Wiles’ former lieutenants--such as Rasdal and Michael Preletz, who now runs Rexon--had left his turnaround team. That left Wiles with younger, less experienced managers not accustomed to his demanding style.

“Q. T. can be very intimidating to a young person,” Hambrecht said. “I think (MiniScribe executives) were more inclined to tell him what he wanted to hear than what they really thought.”

It also turned out that Wiles’ market strategy at MiniScribe didn’t work. To capture a bigger slice of the competitive market for disk drives, MiniScribe started making more expensive drives. In doing so, said John T. Rossi, an analyst at Alex. Brown & Sons, “They took their eye off the ball and neglected their bread and butter business” of mid-range drives.

Environment Called Chaotic

When the expected demand for the high-end drives didn’t materialize, business took a sharp downward turn. MiniScribe reported its first loss in more than three years in the fourth quarter of 1988, a $14.6-million deficit.

A former MiniScribe employee described a chaotic work environment during that period, in which he would constantly be uprooted from a project before it was completed to work on another. “They probably lost 100 people like me,” he said.

Although Hambrecht said Wiles was proud of his ability to steer new products, others indicate that he might not have been as closely in touch with products as has been portrayed. “I don’t believe he understood our technology to any great depth,” said M. Bruce Nakao, chief financial officer of Adobe Systems, a Palo Alto software firm that Wiles managed from its start-up phase.

Critics also charge Wiles with sending the wrong signals to managers. Wiles “understood how investors respond to an appealing story,” analyst Rossi said. “People were doing what was necessary to perpetuate the story” of a successful turnaround, he said.

Wiles also became carried away with his success, Hambrecht admitted. “We all tried to talk Q. T. into slowing it down,” Hambrecht said. “The tragedy was it could have had 25% less (growth) and it still would have been the best ever.”

Hambrecht said his own anger toward Wiles over the MiniScribe fiasco has begun to dissipate. He talked to Wiles recently and said Wiles remains very despondent.