Patent Lawsuit Seen as Driving Takeover Offer
Archive Corp.’s proposed $109-million hostile takeover bid for rival computer products manufacturer Cipher Data Corp. could be an attempt to buy its way out of a potentially costly patent lawsuit, industry analysts said Wednesday.
But analysts said that regardless of the lawsuit, a merger of the two computer tape-drive manufacturers makes some good business sense in an industry that has been consolidating rapidly.
On Tuesday, Archive announced that it had acquired 4.6% of Cipher’s stock and was launching a tender offer to buy the remainder of the San Diego company’s shares for $7.50 each.
Cipher’s directors met Wednesday at a La Jolla hotel before issuing a brief statement. In the releases, Cipher Chairman Gary E. Liebl said the company is studying the offer and will “announce its position within 10 business days of the offer’s formal commencement,” which is expected to be today.
A high-level source close to Cipher said the acrimony between the companies goes back many years. “I’m not sure you don’t have more emotion here than anything,” said the source, who asked not to be identified.
Cipher’s stock jumped 38.5% to close at $6.75 per share, up $1.875, in very heavy trading on the over-the-counter market. Archive’s stock closed at $11.50, up 12.5 cents.
Some analysts said Archive’s motive for the takeover might be tied to the bitter patent dispute between the two companies.
“A very easy way to get out of a lawsuit is to buy the plaintiff,” said Russell Crabs, an analyst with Soundview Financial Group, a Stamford, Conn., investment firm.
The companies have been trading lawsuits and insults since Archive sued Cipher in May, 1988. Cipher has countersued Archive. The suits concern the patent on side-loading technology in cartridge tape drives used to copy data stored on hard disk drives.
Robert Maples, an Archive spokesman, denied that the patent suit was a consideration in the Cipher bid. “The lawsuit had nothing to do with our reason for this,” he said. “We could have settled the suit out of court for a lot less money than $109 million.”
Maples said Archive expects to file required documents with the Securities and Exchange Commission today that will “give all the rationale for going after Cipher.”
Analysts said that if Archive loses the suit, it could be forced to pay millions of dollars in annual royalties to its rival. Cipher has accused Archive of using technology in its products that Cipher says is proprietary. However, Archive has repeatedly contended that it will prevail in the legal battle.
“If one looks at the legal skirmishes over the last year and all, it appears Cipher has the stronger hand,” said Robert Abraham, vice president of Freeman Associates, a Santa Barbara market research firm. In 1988, Cipher won a similar suit against Wangtek, a subsidiary of Simi Valley-based Rexon Inc.
Frederick Ruvkun, an analyst with the New York investment firm Morgan Stanley & Co., said Archive might be pursuing Cipher because it believes the company’s product lines complement each other. He said Cipher has stronger product offerings for “low-end” personal computers, while Archive’s strength is in backup tape drives for high-performance PCs. Both companies have manufacturing plants in Singapore, analysts said, and Archive may feel it can reduce costs by consolidating those operations.
Abraham said Cipher’s $75-million acquisition of Irwin Magnetic Systems of Ann Arbor, Mich., in March was a “godsend” because it gave Cipher Irwin a hot-selling line of 3.5-inch cartridge tape drives to supplement shrinking sales of the half-inch products.
Abraham said it was significant that Archive’s $109-million offer means that the non-Irwin portion of Cipher is only worth $34 million, if the $75 million that Cipher paid for Irwin is still a proper valuation.
Archive spokesman Maples said the company believes Cipher paid too much for the Irwin business. “We never would have paid that much,” he said.
In 1988, the last year for which Freeman Associates has complete data, Archive dominated the $495-million quarter-inch cartridge tape drive market with a 25% share of worldwide sales. Cipher and Irwin were then separate companies with each claiming 10% market shares, Abraham said.
Recently, Cipher has been struggling financially, while Archive has been enjoying record financial results. Cipher lost $14.2 million in the quarter that ended Sept. 30, and announced Oct. 19 that it is laying off 525 workers, or nearly 25% of its work force. Cipher earned $12.1 million on revenue of $217.7 million for its fiscal year that ended June 30.
Archive earned $15.3 million on revenue of $181.4 million for its fiscal year that ended Sept. 30.
