After Ingesting a Rival, Archive Has an Aftertaste : Acquisition: The firm has had to integrate Cipher’s 1,700 employees with its own 1,600, meld product lines and generate cash. It’s making progress but the jury is still out.
COSTA MESA — A year after an acquisition that made Archive Corp. the giant of the $1-billion industry that makes backup storage systems for computers, the Costa Mesa firm is still struggling to achieve the unusual: a high-technology industry merger that works.
While the jury is still out, analysts say Archive appears to be making good progress in creating a successful company in the aftermath of its $140.5-million acquisition last April of its former archrival, Cipher Data Products in San Diego.
The task hasn’t been easy. Archive has had to integrate Cipher’s 1,700 employees with its own work force of 1,600 people, meld diverse product lines and generate enough cash to make interest payments on more than $133 million in acquisition-related debt.
“They are still struggling with a transition from a company with one product line and one culture to a company with diverse products and cultures,” said Raymond Freeman, president of a Santa Barbara market research firm.
And the timing of Archive’s acquisition was inopportune. About three months after the merger was completed, the economy dipped into recession, slowing new computer sales that Archive depends on to generate demand for its product lines.
D. Howard Lewis, 54, who co-founded Archive in 1981, says his firm has gone through the “trough” of the acquisition, putting its weakest quarter behind it. The company has begun making payments on its debt and is now the industry leader with about $400 million in estimated sales for its current year.
“We’re happy from a product standpoint and technology standpoint,” Lewis said. “The financial side could be better. But we think we’re out of the worst phase and we see the business back on a growth pattern.”
Despite Lewis’ optimism, some Wall Street analysts who follow the company have slightly downgraded their financial forecasts for Archive this year. The analysts are wary of the company’s soft sales in the recession, its heavy debt load and the slow pace of the consolidation of Cipher’s operations with Archive’s.
But B.J. Rone, chief financial officer, says the company remains confident that it can make the Cipher deal work as well as its much smaller merger with Maynard Electronics in 1989.
“We recognized early on that life after the merger would be the most difficult part,” he said. “We know that three out of four mergers do not work. But this one is not like a personal computer company going into the copier business. We are in Cipher’s line of work.”
Archive manufactures backup memory systems to protect computers against accidental memory loss, natural disasters, theft and the like.
Although the acquisition left Archive with more debt than any time in its history, company officials don’t foresee any trouble meeting the loan payments, citing favorable payment terms with the company’s lender, Barclays Bank of London. They even hope to have the $133-million debt paid off earlier than the five-year term.
“The whole merger process for high-tech firms is always more difficult than what a paper plan would suggest,” said Peter Cole, an analyst with Dakin, Costigan & Welpton, an investment firm in San Francisco. “I think this one is working.”
To cut costs after the merger, Archive slashed about 200 jobs and eliminated overlapping jobs at its corporate offices. More recently, the company’s work force has climbed back to more than 3,300, about the same number at the two firms before the merger.
The company is still struggling, however, with the transfer of manufacturing from Cipher’s Irwin Magnetics subsidiary in Ann Arbor, Mich., to Archive’s plant in Singapore, a process that has taken longer than expected. And the merging of Cipher operations with the Singapore plant has also proven costly.
For the first quarter ended Dec. 28, Archive reported net income of $816,000, down from $3.5 million a year earlier largely because of the economic slowdown, a weak minicomputer business, costs of the acquisition, and a hefty $4.5-million quarterly interest payment.
In merging the Cipher and Archive operations, Archive has allowed the acquired divisions to operate with a good deal of autonomy.
For example, Archive officials tell the story of how Cipher was in the process of integrating the Irwin Magnetic unit into its business at the time of the Archive takeover. Cipher officials had changed the sign outside Irwin’s headquarters and put up a Cipher sign, telling switchboard operators to answer “Cipher” instead of “Irwin.” Archive’s solution was to stop the integration, change the signs back and restore Irwin’s own identity. Rone says morale among Irwin employees quickly recovered.
Analysts said Archive is well-positioned for success over the long run because of the expected growth in sales of high-powered computer workstations and other computer equipment that will require storage backup systems.
“They dominate the business, and I think they are in the most predictable part of the computer industry,” said Michael Murphy, editor of the California Technology Stock Letter.
Lewis said the company is developing a new line of products, including its TapeXpress family of drives that supply backup storage for smaller mainframe computers.
There are various backup technologies to match each different breed of computer, including personal computers, workstations, network servers, minicomputers and mainframes.
Archive offers products in each of these markets because Lewis believes that no single technology will dominate the industry over the next five to 10 years. That strategy differs from some of Archive’s competitors, who generally have focused on those technologies they believe will prevail.
Archive has 45% of the estimated $491.6-million market for quarter-inch drives for mid-sized computers or computer networks, according to Freeman Associates. The bulk of the market belongs to the DC600 standard quarter-inch magnetic tape drives, which have a memory capacity of 525 megabytes and an installed base in the millions.
The low-end market consists of standard DC2000 mini-cartridge technology, which is inexpensive and aimed at personal computer users who normally back up their data on floppy disks. Mainly through its Irwin unit, Archive has about 75% of the mini-cartridge market.
The digital audio tape (DAT) technology fills a gap between the quarter-inch tape drives, offering high capacity and high-data-recovery speeds. DAT drives use the same technology as the tiny audiocassettes that recently have arrive in the U.S. market.
The DAT market is expected to grow from $77.2 million in worldwide sales last year to $673.4 million by 1995, eventually eclipsing quarter-inch cartridges as the main form of backup storage, Freeman estimates.
Archive’s ARDAT subsidiary is expected to sell $50 million worth of DAT drives this fiscal year ending Sept. 30, leaving the company in a good position in the emerging industry, analysts estimate.
How Archive manages that transition is its biggest technological challenge, analysts said. If it slips, smaller rivals could pull away from Archive in the race to develop the latest technology.
In the future, Lewis believes the company will be able to get synergies from the evolution of technologies. For instance, he said data compression techniques developed in one area could be applied to another.
Lewis said there is nothing inherently good or bad about a decentralized management structure. The key is executing a strategy and giving it time to work, he said.
“Changing the structure is very disruptive,” he said. “We work hard to make sure that it works.”
As the one-year anniversary of the Archive-Cipher merger passes this week, investors will no doubt wonder when the merger is going to begin paying returns.
Rone said there is always a temptation to make an acquisition appear more successful with some financial razzle-dazzle, such as selling off divisions or cutting employees.
“You can make short-term earnings look better, but you have to consider the trade-off between short-term earnings and the long-term health of the company,” he said. “We think our performance will come about two years down the road, and the recession could add a year to that.”
Worldwide Sales Sales of cartridge tape backup systems for storage of computer data are expected to grow by 18.6% by 1994. In millions of dollars Source: Freeman & Associates
ARCHIVE AT A GLANCE Headquarters: Costa Mesa
Top Executive: D. Howard Lewis, chairman, chief executive and president
Operating units: Archive Technology, Ardat Inc., Cipher Data Products, Irwin Magnetic Systems, Maynard Electronics, Optimem
Principal products: Data storage systems
Employees: 3,300
Revenue: $293.2 million *
Net income: $11.5 million
* Year ended Sept. 29, 1990
