Irvine’s Rainbow Holding the Key to Safe Driving on Info Highway
For years the fear of software piracy has brought the giants of technology to the door of Rainbow Technologies Inc., which protects programs with matchbook-size devices that plug into the backs of personal computers.
Buyers such as Microsoft Corp., Borland International and Hewlett-Packard Co. include the keys with software programs that they sell, particularly those marketed in foreign countries where intellectual property standards are lower or are not enforced. Software codes can be written so they will not run unless one of Rainbow’s keys is plugged into a computer’s printer port.
“We’re an insurance company,” said Walter Straub, Rainbow’s chief executive officer. “Customers will continue to buy insurance as long as they see a threat.”
Now Rainbow, based in Irvine, is positioning itself as an arms merchant in the next data war: the fight over how much protection there should be for information transmitted between computers. In October, Rainbow signed a letter of intent to buy Mykotronx Inc., a privately held Torrance company that makes a controversial microprocessor known as the clipper chip.
*
Adopted as a procurement standard by the U.S. Department of Commerce earlier this year, the chip will allow police agencies to decode scrambled electronic signals to eavesdrop on digital communications sent by modems, fax machines and other telephone links. The decoding would be conducted under the same principle as legally authorized wiretaps of ordinary telephone conversations.
On the surface, acquiring Mykotronx would appear to be an excellent move for Rainbow. With on-line data transmission replacing many of the distribution functions that were once done by floppy disk, publicly traded Rainbow could position itself as an industry leader and respected voice in national debates about encryption standards and on-line privacy issues.
But Wall Street has not been kind recently to Rainbow’s stock, driving it down in recent weeks from about $16 a share after the Mykotronx proposal was announced to a close of $12.25 in Wednesday’s NASDAQ trading.
Analysts say that the 23% decline probably has to do with uncertainty about if and when the deal will close.
“It’s people discounting the acquisition as the days go by until it’s finally announced,” said Steve DeLuca, an analyst at investment bank Cruttenden & Co. in Irvine.
DeLuca and other analysts are generally positive about a Rainbow-Mykotronx combination, which would broaden Rainbow’s revenue base.
Though Rainbow also sells procedures to protect data on CD-ROMs, about 95% of its revenue comes from sale of its protection keys, Straub said. The company reported 1993 revenue of $35 million, while Mykotronx had revenue of about $9 million.
John J. Girton, an analyst at the San Francisco brokerage Van Kasper & Co., said Rainbow’s recent stock slide may reflect some investors’ doubts about whether Mykotronx’s chip technology can be commercialized at competitive prices.
Rainbow is in a good position overall, however, said Girton, whose company co-managed a Rainbow stock offering in 1991.
“There’s been some concern about whether the deal is going to go through, but we think it’s a long-term buy,” he said of Rainbow’s stock. “From our perspective, it doesn’t matter if the deal goes through or not, since the stock’s trading at what it was before.”
*
Although the clipper chip standard is voluntary, privacy advocates assert that government agencies are using it to pressure commercial suppliers of telephones and computer modems to implant the device in consumer goods as well as those sold to public agencies.
Whatever the fate of clipper, Mykotronx, as the sole supplier of the chip and other related encryption technologies, is well positioned to benefit as norms are established for the coding and decoding of data. The company now has contracts with the National Security Agency, including an agreement to supply equipment for spy satellites.
Mykotronx President Ted Bettwy said this week that, if Rainbow follows through with the purchase, it will pay between $20 million and $25 million for the company. Straub and other Rainbow executives said they would not comment until the deal is closed. That could happen as soon as later this month or early January, Bettwy said.
Rainbow was founded in 1984 by Straub and others, and initially produced upgrade products for dot-matrix printers. The idea for software protection keys resulted from a collaboration with California Software Products Inc., a Santa Ana company seeking a way to safeguard a $3,500 software program it was selling that allowed small computers to mimic the functions of much larger machines.
In addition to its Irvine headquarters, which has about 40 engineers among its 100 employees, Rainbow has manufacturing facilities in northern Thailand and in France, where it bought competitor Microphar SA in 1992. Worldwide, the company has about 160 employees.
California Software Products still buys about 8,000 protection devices from Rainbow each year, said Elizabeth Richell, a vice president of marketing there.
“It’s not something you’d want to put out unprotected,” Richell said of her company’s software. “We’ve stayed with them,” she said of Rainbow, “because their products are reliable. We’ve got systems in some very obscure, hard-to-reach places, so it’s important that we can depend on their products.”
Companies such as California Software that sell overseas often find that other countries do not have the intellectual property protections they have come to rely on in the United States.
Trade groups representing the major software companies estimate between $7 billion to $12 billion in sales are lost worldwide each year to software piracy. That is a main reason for the inclusion of intellectual property protection agreements in many multinational trade pacts, including the massive Global Agreement on Tariffs and Trade, or GATT treaty, scheduled for a vote today in the Senate.
Companies that buy Rainbow’s keys generally include them with software packages costing $250 for sale overseas and $500 or more in the United States, said Michael Emerson, the company’s marketing manager.
Demand for data protection will only increase, Straub said, as electronic distribution becomes more popular.
Rainbow Vision
With its intention to buy Mykotronx Inc., Irvine’s Rainbow Technologies makes a bid for a central position in the future of data transmission. A look at the company:
Rainbow Technologies at a Glance
* President and CEO: Walter Straub * Products: About 95% of Rainbow’s revenue come from sales of computer hardware to protect software against piracy. * Other offices: Charlotte, N.C.; Paris; London; Munich, Germany, and Calgary, Canada * Employees: 160 worldwide, including about 100 at Irvine headquarters, 25 in Munich and 14 in London
Stock Tumble
Rainbow’s stock declined most of the year, then rallied in October, but ended November well below its January level. Closing prices for the last Friday of each month:
Nov. 30: $12.25
Source: Times reports
