The Deal That Just Won’t Happen : Delays Raise Question of Whether DPC Intended to Buy Dataproducts or Merely Drive Its Stock Up

“I’ve done much bigger deals than this,” John K. Castle said a year ago when asked whether his investor group might launch a takeover of Dataproducts Corp., a Woodland Hills company that is the biggest independent supplier of computer printers in the country. “I’ve done deals in the billions of dollars.”

Castle’s group had just bought 5% of Dataproducts’ stock. A few months later his group, called DPC Acquisition Corp., did indeed make an unsolicited, $273-million offer to buy the rest of the company.

Castle, a former chief executive of the New York investment banking firm Donaldson, Lufkin & Jenrette Securities, was right on one count: The Dataproducts deal is small potatoes in today’s world of billion-dollar takeovers. But small or not, Castle and DPC have been unable--or unwilling--to complete even this minor deal.

After dragging on for a year, DPC’s effort to buy Dataproducts has made little progress. DPC still does not have the money to pay for the company, even though Dataproducts--which has treated DPC with less than open arms--claims it will drop its opposition if DPC can prove it has the cash.

“They obviously are having trouble coming up with the money,” said Dataproducts Chairman Jack C. Davis. He said Dataproducts’ employees are “anxious for the process to be over, and if these people can’t obtain the financing, to quit creating this disruption.”

Dataproducts’ stock, meanwhile, keeps drifting lower as the delay drags on, leaving DPC in the hole. The group owns about 1.53 million shares, or 7.5%, of Dataproducts’ stock, for which it paid an average of nearly $13 a share, said Munawar Hidayatallah, a partner of Castle’s who is chairman of Crescott Inc., a New York holding company that is one of DPC’s investors. Yet Dataproducts’ stock--which reached $17.50 last year amid the takeover speculation--closed Monday at $7.50 a share on the American Stock Exchange, giving DPC a paper loss of roughly $8.4 million.

It turns out Dataproducts isn’t the hottest property on the market. Davis himself has been trying for more than a year to boost the value of Dataproducts’ stock, and between February and September he approached 70 parties about buying the company. But only DPC and one other, unidentified concern made offers. Dataproducts rejected both as inadequate.

A sign of DPC’s struggle came last month when it parted ways with Chase Manhattan Bank, which DPC had hired to arrange the necessary financing. Chase was replaced by the investment firm PaineWebber “through mutual agreement” between Chase and DPC, Hidayatallah said.

Chase’s exit triggered speculation on Wall Street that the turmoil in the junk-bond market and Dataproducts’ internal problems had made investors reluctant to finance a takeover of the company. Chase declined comment.

DPC plans to use a combination of bank debt, its own cash and high-yield, high-risk “junk bonds” to buy Dataproducts. DPC blames the delay largely on the collapsing junk-bond market, where investors have shied away from buying bonds because other companies that were acquired with junk bonds are now defaulting.

“The demand for junk bonds is not as great as it was,” Hidayatallah said. But he added, “I am highly confident, regardless of the disarray in the financial markets, that financing can be put together, but it’s going to take a little more time.”

DPC also is asking Dataproducts’ stockholders for their consent to replace Dataproducts’ board of directors with DPC’s own nominees, who are committed to liquidating the company by selling its various divisions. But that also will take time. Last week DPC said that not enough shareholders have lent their support to oust the board.

DPC began talking with Dataproducts’ executives in October, 1988, and last August it formally proposed an offer of $15 a share in cash and securities for the remaining stock.

Dataproducts said no thanks, and in September began its own restructuring that will include the sale of its 22-acre headquarters property, a special dividend of about $2 a share, and the elimination of 400 manufacturing jobs in Woodland Hills.

The company also planned to sell its Dataproducts New England unit, which makes rugged printers for the military and accounts for 14% of Dataproducts’ overall revenue. But the slowdown in defense spending has cut the unit’s potential sales price, and “we don’t feel confident we’ll be able to sell that business at this time,” Davis said, declining to specify the unit’s possible price.

Dataproducts undertook the restructuring as much to streamline its operations and improve its unimpressive earnings as to ward off DPC.

The company has struggled in recent years to update its products with new laser technology, cut operating costs and maintain its sales and profit growth. In its fiscal year ended March 25, 1989, the company earned $3.8 million on sales of $353.4 million, down from a $9-million profit two years earlier. (In fiscal 1988, it lost $20.2 million in large part because of an earlier restructuring.)

To cover its latest overhaul, Dataproducts took a $4.5-million charge in its fiscal second quarter, giving the company a $7.7-million net loss on revenue of $163.3 million for the six months ended Sept. 23.

Then in late October, DPC went directly to Dataproducts’ other stockholders by launching a cash tender offer of $10 a share, or $190 million. Dataproducts urged its stockholders not to tender unless DPC showed it had the financing, but said it would not oppose the bid if the money appeared.

But the money hasn’t appeared, raising the question of whether DPC is unable to raise the funds, or whether DPC never really wanted to buy Dataproducts but simply hoped to flush out a third party in order to make a profit on its Dataproducts stock.

Hidayatallah insisted that DPC wants to acquire Dataproducts and then sell its operating assets because it believes the pieces “are probably worth more than $10 a share.” Dataproducts’ operations include its commercial computer printer manufacturing division; its supplies division that provides inks, toners and other supplies for printers, and its military printer group.

To date, DPC claims that about 33% of Dataproducts’ 20 million shares outstanding have been tendered to the group. But DPC keeps extending the offer because it doesn’t yet have the money, meaning those stockholders who have tendered are free to take their stock back from DPC.

If DPC does raise the cash, the success of its offer could well depend on Equitable Life Assurance Society of the U.S., a major New York-based insurer and Dataproducts’ biggest stockholder with a 20% stake. But Equitable spokeswoman Linda Finnerty declined comment on how Equitable views the DPC bid, saying the insurer’s policy is not to publicly discuss its investments.

Equitable, coincidentally, owns Castle’s former employer, Donaldson, Lufkin & Jenrette. But Castle has said he became interested in Dataproducts independently after leaving the firm.