Ending a seesaw takeover battle, Cipher Data Products agreed Monday to be acquired by Costa Mesa-based Archive Corp. for $121 million in cash.
The merger of the two rival computer tape-drive makers will create a company with combined revenue of about $350 million, using annual, current sales figures. The new company will control roughly 45% of the fast-growing, quarter-inch-wide, cartridge tape-drive market, analysts said.
Under terms of the deal, Archive will pay $8.25 a share to acquire the approximately 95% of Cipher's stock it doesn't already own.
Archive Chairman D. Howard Lewis said in an interview Monday that there were "really good strategic reasons for combining Archive and Cipher. (Cipher) has good, strong technology," particularly in the growing, 3.5-inch cartridge tape-drive market. Tape drives are used by computer owners to back up hard and floppy disk drives.
But Archive was also motivated to acquire Cipher as a way of disposing of the patent infringement lawsuit filed by Cipher against Archive last year, analysts said. The suit alleges that Archive improperly used loading technology developed by Cipher for its cartridge tape drives. Cipher has said its legal action was strengthened when it won a similar suit against competitor Wangtek last spring.
The patent case, which was scheduled to go to trial in federal court in Santa Ana next October, now has been "rendered moot" by the merger agreement, Archive and Cipher officials said Monday.
Archive launched a hostile, $7.50-a-share tender offer for Cipher on Dec. 19. Cipher's board rejected the initial offer as "inadequate, excessively conditional and not in the best interest of the company or its shareholders." The offer was particularly inadequate, Ciper's directors said, in light of Archive's potential liability in the patent suit.
Nevertheless, as of March 8, owners of 85% of Cipher Data's outstanding shares had tendered their stock to Archive.
The success of Archive's bid remained uncertain, however, because of Cipher Data's "shareholder rights plan," an anti-takeover measure designed to dilute the holdings of any shareholder who acquired more than 15% of Cipher stock without the San Diego's firm'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 anti-takeover plan. However, Archive received good news that, despite industry analysts' concerns that the merger could violate Hart-Scott-Rodino antitrust statutes, federal regulators would not oppose the merger.
"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.
In a statement Monday, Cipher said it has received an opinion from First Boston Corp., its financial adviser, that the amended offer is fair and that its directors will unanimously recommend approval. The Cipher board also said it has exempted the Archive transaction from its anti-takeover plan.
Archive said it has received a "commitment letter" from Barclay's Bank, indicating that it expects to execute a definitive credit agreement by the end of this week with funding contingent on "standard conditions."
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 lost $26.1 million on revenue of $82.2 million, contrasted with a $7-million profit on revenue of $105.9 million for the same period the previous year.
The deteriorating market for Cipher's half-inch, reel-to-reel tape drives, which are used to back up information stored in minicomputers, was a big cause of the company's woes. The sluggish sales reported by major minicomputer manufacturers, including IBM, Digital Equipment and Unisys, had a direct 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 corresponding period a year earlier.
Cipher'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 revenue for the past two quarters.
"I think Archive's strongest motivator was to resolve the patent suit, which this apparently does," said Raymond C. Freeman, president of Freeman Associates, a Santa Barbara-based computer market research firm. "But Irwin is the prize within the Cipher package, in terms of market position. There will be a strong market trend over the next few years toward 3.5-inch form factors because the size of data storage devices in computers is continuing to down-size."
In response to dramatic drop-off 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 to Singapore.
Sources close to the tender offer say Archive will honor the $2.8 million in aggregate golden parachute severance payments due to Cipher Chairman Gary Liebl and seven other executives. Liebl was unavailable for comment on the agreement Monday.
MERGER PARTNERS AT A GLANCE
After years of bitter competition and months of fitful negotiation, Cipher Data Products of San Diego has agreed to be acquired by Costa Mesa-based Archive Corp. for $8.25 a share.
Location: 1650 Sunflower Ave.
Business: Manufactures tape drives used to back up computer hard disks.
Top executive: D. Howard Lewis, chairman and CEO.
Revenues: $47 million for the first quarter, ending Dec. 29, up 31% from the year-ago quarter.
Net income: $3.5 million for the first quarter, up 9% from the year-ago quarter.
Stock exchange: OTC.
Monday's close: $9.12 1/2, up $0.12 1/2.
CIPHER DATA PRODUCTS
Location: 9715 Business Park Ave., San Diego.
Business: Manufactures digital magnetic tape drives.
Top executive: Gary E. Liebl, chairman and CEO.
Revenues: $41.5 million for the second quarter, ending Dec. 13, down 23% from the year-ago quarter.
Net income: A $12-million loss for the second quarter, contrasted with a $4-million gain in the year-ago quarter.
Stock exchange: OTC.
Monday's close: $8.12 1/2, up $0.37 1/2.
Sources: The companies, Standard and Poor's Register