Ghost of Chapter 11 Doesn’t Spook New Tandon Enterprise
Just eight months ago, the shell of what was once giant Tandon Corp. filed for bankruptcy protection, ending one major chapter in the Tandon family of India’s boom-to-bust experience in personal computer manufacturing.
Now the Simi Valley-based Tandons are back in the public market: On Tuesday, Los Angeles brokerage Wedbush Morgan Securities underwrote a stock offering for Golden Systems Inc., a Tandon family enterprise that uses super-low-cost Indian labor to make parts for PCs.
Despite the Chapter 11 ghost haunting the family name, Golden Systems was able to raise $17.5 million by selling 2.5 million shares to investors at $7 each. The stock closed Thursday at $7.75 on Nasdaq.
Wall Street is supposed to have long recall, but in this case investors have apparently been willing to shake off the bad memories of Tandon Corp.’s sad saga of management missteps and convoluted, cross-national family dealings. Forgetting may not be so easy for the 60,000-some Tandon Corp. shareholders, however: Their stock, which traded as high as $35 a share in 1983, is virtually worthless today.
To be fair, the man behind Tandon Corp.--Sirjang Tandon, known as Jugi--is listed as merely a passive shareholder in Golden Systems, with 3% of the stock. The company is run by Jugi’s younger brother, 43-year-old J.L. (Jay) Tandon, who, according to the stock prospectus, was never involved directly with Tandon Corp., now known as TSL Holdings.
Jay Tandon says the issue of family ties didn’t come up in meetings with prospective buyers before the stock offering. He believes investors are focusing on Golden Systems’ potential, rather than on what went wrong at Tandon Corp.
Basically, Golden Systems used to build parts for Tandon Corp.’s PCs, which at one point were strong sellers in Europe. As bigger PC players slowly squeezed Tandon out of the market, Jay Tandon says, his PC-component branch of the family business had to find someone else to sell to.
Ironically, the same cutthroat PC price competition that helped hasten Tandon Corp.’s demise helped Golden Systems get a new start: Over the past year, Jay Tandon has landed contracts with Compaq, IBM, Olivetti and AST Research to build “power packs” for some of their PC models. Result: Golden Systems’ revenue jumped from $4.5 million in the fiscal year ended in March, 1992 to $21.3 million in fiscal 1993. In the first half of this year, revenue was $12.7 million.
A PC power pack is a relatively simple but crucial device that converts the alternating electric current (i.e., what comes out of the wall) into the direct current--at appropriate voltage--required to power a computer. Simple as they are, power packs are extremely labor-intensive to manufacture: Human beings are needed to wind wire around magnets.
That’s the Tandon edge. Golden Systems now employs 1,300 Indians to wind power packs, at wages among the world’s lowest. On top of that, the Tandons get special tax breaks as exporters. The upshot is that Golden Systems can offer PC makers an extremely low-cost product, at a time when all PC firms are desperate to slash expenses.
Jay Tandon insists, however, that his power packs are more than a commodity product that Compaq and other buyers could replace at whim, should lower-cost labor surface somewhere else on the globe. That’s because each power pack must be specifically designed for the PC model it fits, Jay Tandon says. “Once we’re designed in, they can’t just go to the guy next door to change it,” he says.
Even so, competition is fierce (especially from Taiwanese firms), and PC model life spans are ever shorter. That means Golden Systems must constantly battle for new contracts.
What apparently attracted some money managers to the deal is that $5.6 million of the stock sale proceeds will be used to immediately expand the Indian manufacturing operations. The bet here is that Jay Tandon can sell all the power packs he can make, and that he now can make plenty.
Still, this is hardly a stock anyone could yet confidently label a growth issue. Last quarter, Golden Systems earned just $188,000, on 4.2 million shares outstanding.
The bigger issue, say some money managers who studied the deal, is the inter-relationship of Tandon family businesses in India. As the prospectus notes, “Due to limitations on the company’s capital resources and restrictions on currency flows in and out of India, the company has from time to time sought and obtained financing through related party transactions”--i.e., deals with family members.
In the prospectus, no fewer than 11 separate Tandon family companies are listed as doing business with Golden Systems. The obvious worry is the potential for self-dealing.
Jay Tandon notes that his corporate board is dominated by outsiders, and that a non-family member is chief financial officer. “We have our own financial controls,” he assures.
Nonetheless, ascertaining who within the Tandon empire owed what to whom was a constant concern for Tandon Corp. shareholders, say people who knew Jugi Tandon’s operation. “Jugi was one of the sloppiest managers in the world,” says one computer industry analyst. And reading the Golden Systems prospectus, the section outlining the formation of the company is by itself a brain-twister, detailing Panamanian shell companies used as family trusts.
While there’s no question that Jay Tandon has a real product and real contracts, one investment banker who knew the family’s operations in the ‘80s still cautions: “Caveat emptor was a phrase invented for this group.”
The Tandon Advantage
The Tandon family of India has been able to build a computer-parts manufacturing business thanks in part to India’s extraordinarily low labor costs. Here are 1991 average manufacturing wages per hour, in U.S. dollars: Japan: $13.64 Germany: $13.17 United States: $10.73 Ireland: $9.21 Taiwan: $5.89 Singapore: $4.14 Mexico: 0.96 India: 0.37 Source: International Labor Office, 1992 yearbook
