Archive Still Struggles a Year After Merger : Computers: Analysts say, however, that the Costa Mesa firm is making progress after acquiring Cipher Data Products.
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-based 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, 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, said 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 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, said 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’ 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 of 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.
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.
