Archive to Acquire Rival Cipher in $121-Million Deal

SAN DIEGO COUNTY BUSINESS EDITOR

Ending a seesaw takeover battle between bitter rivals in the computer tape-drive market, Archive Corp. agreed to acquire Cipher Data Products in an $8.25-per-share, $121-million cash tender offer, both firms announced Monday.

The merger under the Archive banner will create a computer peripherals manufacturer with revenue of about $350 million, using annualized, current sales figures. The newly merged firm will control roughly 45% of the fast-growing quarter-inch cartridge tape-drive market, analysts said.

Archive Chairman D. Howard Lewis said in an interview that there were "really good strategic reasons for combining Archive and Cipher. (Cipher) has good, strong technology," particularly in the 3.5-inch tape-drive market. Tape drives are used by computer owners to back up hard and floppy disk drives.

But Costa Mesa-based Archive was also motivated to acquire San Diego-based Cipher as a way of disposing of the patent infringement suit filed by Cipher Data last year, analysts said. The suit alleges that Archive improperly used loading technology developed by Cipher for its cartridge tape drives. The legal action was strengthened by Cipher's victory in a similar suit against competitor Wangtek last spring.

The lawsuit, which was scheduled to go to trial in a Santa Ana federal court next October, now has been "rendered moot" by the merger agreement, Archive and Cipher officials said Monday.

Archive launched a hostile $7.50-per-share tender offer for Cipher on Dec. 19. Shortly after the offer was launched, Cipher's board rejected it as "inadequate, excessively conditional and not in the best interest of the company or its shareholders." The tender offer was particularly inadequate in light of Archive's potential liability in the patent suit, Cipher's board said.

Nevertheless, owners of 85% of Cipher's outstanding shares had tendered their stock to Archive as of March 8.

However, the success of Archive's hostile tender offer was still at issue because of Cipher Data's anti-takeover "poison pill" shareholder rights plan that was designed to dilute the holdings of any shareholder who acquired more than 15% of Cipher stock without its board's approval.

In a Jan. 29 hearing in U.S. District Court in San Diego, Archive received bad news when it was denied a request for a preliminary injunction that would have effectively nullified the poison pill. However, Archive received good news that, despite industry analysts' concerns that the merger could violate Hart-Scott-Rodino antitrust statutes, the tender offer went unopposed by regulators.

"Once Hart-Scott-Rodino thresholds were passed, there were only a couple of things that could happen," said Scott Rowe, high-technology analyst with Robertson Stephens & Co., an investment banking firm in San Francisco. "Either Cipher would come up with a white knight or Archive would come up with a higher price," Rowe said.

Cipher became vulnerable to a takeover after its stock price was dragged down by two quarters of steep losses and sharply declining sales. For the six months ended Dec. 31, Cipher reported a $26.1-million loss on $82.2 million in sales, contrasted with a $7-million profit on sales of $105.9 million for the same period the previous year.

The deteriorating market for Cipher's half-inch reel-to-reel tape drives, a product line that is used by owners of minicomputers, was a big cause of the company's woes. The sluggish sales reported by major minicomputer manufacturers, including International Business Machines, Digital Equipment and Unisys, had a negative impact on demand for Cipher's products.

For its first quarter ended Dec. 29, Archive reported a profit of $3.5 million on sales of $47 million, up from a profit of $3.2 million on sales of $35.9 million for the same three months the previous year.

Cipher Data's sales would have declined further had it not acquired Irwin Magnetics last April, a manufacturer of quarter-inch tape drives that fit a 3.5-inch form factor. The acquisition added nearly $29 million to Cipher's revenues for the past two quarters.

In response to a dramatic drop in demand for its half-inch tape products, Cipher Data attempted a restructuring, reducing its work force by 24% since October to the current 1,682 employees and moving most of its remaining U.S. manufacturing capacity to plants in Singapore.

Sources close to the tender offer say Archive will honor the $2.8 million in aggregate "golden parachute" severance payments due to Cipher Data Chairman Gary Liebl and seven other executives. Liebl was unavailable for comment on the agreement Monday.

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