Kingston Technology Agrees to Sell 80% Stake
Making another foray into the American computer industry, Softbank Corp. of Japan said Thursday it has agreed to acquire an 80% stake in computer memory giant Kingston Technology Corp. for $1.5 billion.
The pending purchase is part of an ongoing shopping binge by Softbank and marks the beginning of a new era at Kingston, a Fountain Valley company founded by two Chinese immigrants so devoted to their workers that they plan to share part of their billion-dollar windfall with their employees.
Executives at the two companies said the combination would enable Kingston to build new markets in Japan for its computer memory boards and other products while preserving the business practices that have made it one of Southern California’s great high-tech successes.
Under terms of the deal, founders John Tu and David Sun will continue to run the company, “retaining all of its current management, its current personnel and its operating philosophies,” according to a Softbank news release.
Tu and Sun started Kingston in 1987 and built it into a $1.5-billion powerhouse that is now the world’s largest maker of computer memory boards. They also garnered a reputation for going to great lengths to take care of their employees, and in a telephone interview from Japan on Thursday, Tu said that tradition will continue.
“We always said we would take care of our employees,” Tu said. “A substantial chunk of the money will be distributed to the 500 employees.”
The acquisition of Kingston is expected to boost the annual revenue of Softbank to more than $3.5 billion this year. It also thrusts Softbank and its maverick president, Masayoshi Son, to the front of a volatile computer memory business that has grown rapidly but is in the midst of a painful collapse in prices.
Softbank, which Son founded in 1981 with $1 million he made selling a pocket translator he invented to Sharp Corp., made its first big splash in the U.S. computer industry last year when it acquired the Comdex trade show business for $800 million. It quickly followed up with the February 1996 acquisition of the Ziff-Davis publishing operations, which include PC Magazine, Computer Shopper and PC Week, for a stunning $2.1 billion.
The company has also made dozens of investments in Internet software companies--including the search engine firm Yahoo! and the electronic payment pioneer Cybercash--with the aim of becoming a comprehensive source for the marketing and distribution of computer products and information. Son, whose Korean heritage and business style are unheard of among the Japanese business elite, is often called Japan’s Bill Gates.
But all that buying--and the borrowing that has gone along with it--has led to concern that Softbank is dangerously overextended. The company already sports $2.4 billion in debt, and will borrow another $750 million and issue $475 million in stock to pay for Kingston.
Ron Fisher, vice chairman of Softbank’s U.S. holding company, brushed aside concerns about the company’s debt level.
“Despite our aggressiveness in acquisitions, we manage our company conservatively on a fiscal basis,” Fisher said. “Softbank’s companies have very strong cash flow, which allows us to expand our business as rapidly as we have.”
He also pointed out that Kingston is virtually debt free because the company’s founders didn’t rely on venture capital, never sold any stock in the company and financed its expansion by plowing profits back into the company.
Analysts also questioned the strategic fit of the Kingston acquisition.
“It does seem like this is a step outside their core competency,” said Ron Bohn, an analyst at Dataquest in San Jose. “With the pricing in the [memory] market at this time, does Softbank know what they’re getting into?”
Fisher dismissed these concerns as well, noting that Kingston’s profit margins are healthy and that the deal came together because both companies saw an opportunity to take Kingston’s success and duplicate it in Asia.
“Kingston has a very limited presence in Japan, [which] accounts for about 10% of the PC market in the world,” Fisher said. “We are by far the leading distributor of software in Japan, so we have thousands of resellers that we can take the Kingston product and put through our channels.”
For Sun and Tu, who landed on the Forbes 400 list of the nation’s wealthiest people last year, the acquisition is a gigantic payday. The two will be paid more than more than $1.1 billion in cash and $425 million in Softbank stock, making them the company’s second-largest shareholders with a combined 4.9% stake.
The two, who shun offices and instead sit at desks in the center of their company’s bustling sales floor, will also retain a 20% stake in Kingston.
Sun and Tu founded Kingston in 1987 and prided themselves on paying attention to the details of the business. Kingston inspects every memory module it ships and is so nimble that it often rolls out add-on memory products for certain PCs the same day the computers hit the market. The two also foster employee loyalty and reward their workers by earmarking 5% of the company’s profits each quarter for employee bonuses.
As Kingston grew, the founders often fretted that they might not be able to preserve the company’s caring environment as the number of employees swelled. Tu and Sun also resisted the temptation to sell stock to the public largely because they did not want stock market pressures to change their approach.
Tu admitted that he and Sun have given up a significant amount of control over their company’s fate, but stressed that a key reason they agreed to the deal is that the culture of the two companies, Kingston and Softbank, match.
“Many companies [interested in buying Kingston] have approached us almost on a monthly basis,” said Tu, 55. “We always said no. This was the first time that we saw the chemistry and the culture, and how we could help each other in the long run.”
He also said that he and Sun may take positions on Softbank’s board of directors.
The deal was initially conceived two months ago as a distribution venture to help Kingston crack into the Japanese market, Tu said. After several dinner meetings with Softbank’s Son, the two found that “we liked each other as companies and people,” Tu said.
Kingston supplies major PC manufacturers and also makes memory boards that can be added to older computers to boost performance. The demand for memory has mushroomed, partly because of the exploding popularity of computers, and also because newer software and operating systems require increasing amounts of memory to function efficiently.
As a result, Kingston and other memory manufacturers, including Simple Technology in Orange County, have been among the fastest growing companies in the United States in recent years. But a 75% drop in computer memory prices over the last year has reduced Kingston’s sales growth to its slowest rate ever.
Asia represents a fertile new market for Kingston, which draws nearly 70% of its revenue from the U.S.
“That’s one of the compelling reasons,” Tu said. “We know that Asia is a huge market for Kingston’s product line--it could be as high as half a billion dollars in Japan alone.”
* NICE PLACE TO WORK: Kingston’s founders treat their 500 employees like family. D1
