Read-Rite Corp.

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Read-Rite Corp.

345 Los Coches Street
Milpitas, California 95035
U.S.A.
(408) 262-6700
Fax: (408) 956-3205

Public Company
Incorporated: 1981
Employees: 10,488
Sales: $515.6 million
Stock Exchanges: NASDAQ
SICs: 3679 Electronic Components, Nee.

Read-Rite Corp. is the world’s top supplier of thin-film recording heads, a component used in Winchester disk drives to read data stored on a computer’s hard disk. Read-Rite also manufactures the head stack assemblies that house these thin-film recording heads, holding a small but growing market share in that segment. The company’s client base consists of other manufacturers of computer components, including Western Digital, Maxtor Corp., Conner Peripherals, Inc., Digital Equipment Corp., NEC, Quantum, and Micropolis Corp. Demand for Read-Rite’s highly specialized product has been bolstered by the computer industry trend towards obtaining higher performance from increasingly smaller components. Moreover, competition in the company’s market was slight; in 1994, there were fewer than five similar manufacturers in the world. However, analysts predicted that more companies would enter the arena in the late 1990s.

Read-Rite was founded by a group of computer scientists and venture capitalists in California’s booming Silicon Valley. Well versed in the ways of the computer industry, this group responded to a perceived trend towards increasingly smaller hard drives and a corresponding need for technology that would allow data to be accessed quickly and efficiently. The group believed thin-film recording technology was the key. With an initial investment of $23 million provided by Hambrecht & Quist, Citicorp Venture Capital Ltd., and several other financial partners, Read-Rite was established in November 1981, in Milpitas, California, to begin producing thin-film recording heads.

By November 1984, Read-Rite has shipped its first thin-film recording head. During its first year of operations, the company shipped approximately 100,000 thin-film heads, one of the highest first-year volumes in the burgeoning thin-film head industry. As other component manufacturers experienced sales slumps during this time, Read-Rite sales grew, bolstered by an increasing demand for thin-film products. Between February 1985 and February 1986, the company’s order backlog quadrupled. Although it was far from making a profit, the company had a strong balance sheet, resulting from additional funding that amounted to $14 million over two years.

In November 1986, Read-Rite merged with Cybernex, the world’s largest producer of thin-film head. Cybernex had recently suffered from a trade secret suit filed against it by IBM, the result of which was an out-of-court settlement stating that Cybernex could no longer continue as an independent business. Through a stock-swap, Read-Rite absorbed all of Cybernex’s assets, including its production facilities, staff, and technology patents.

By June 1987, Read-Rite had shipped its one-millionth head and had established accounts with several key components manufacturers, including Maxtor Corp. and Conner Peripherals. However, with Read-Rite’s increased sales came a host of manufacturing problems. In early 1987, imperfections appeared in the chemical compounds used in manufacturing head assemblies. Originally intending shipments to be temporarily delayed as the company rectified the problem, Read-Rite found the situation to be more severe than expected. Two of its key customers, Micropolis and Maxtor had to delay hard drive production, generating some bad publicity for Read-Rite. Furthermore, its own production delays stopped up cash flow. The company was forced to lay off over 30 percent of its work force, and Chairperson John R. Osborne and President Wade Meyercord were replaced by a “turn-around” team assembled by Hambrecht & Quist, Read-Rite’s principal financial partner. The company posted a total loss of $34 million in 1987 and 1988, on combined revenues of $39.5 million.

The following year, however, Read-Rite’s sales hit $38 million, and the company experienced its first profitable year. Business began booming, and, in 1990 alone, the company shipped seven million thin-film heads, resulting in an almost 50 percent increase in sales to $73 million. When Cyril J. Yansouni joined Read-Rite in 1991 as chairperson and CEO, company sales and profits were beginning to take off.

The first project Yansouni undertook was to help reach a joint-venture agreement with Japan’s Sumitomo Metal Industries to establish thin-film head operations in Japan. Sumitomo, a leading steelmaker, had been attempting to break into the data storage industry with its own thin-film heads, producing 50,000 heads monthly and having difficulty breaking into the American market. Conversely, Read-Rite, which was putting out two million heads monthly and held the top market share in the United States, was badly in need of a cash infusion. In the venture, Sumitomo put more than $20 million towards the construction of an assembly plant near Osaka and also invested another $20 million in Read-Rite in exchange for a ten percent stake in the company. Scheduled to begin production in 1994, the venture put Read-Rite in an advantageous position to profit from an expected boom in Winchester disk drives in the Japanese market. Sumitomo and Read-Rite each held a 50 percent stake in the venture, named Read-Rite SMI.

Read-Rite had earlier attempted to enter into the head stack assembly (HSA) business, which would allow the company to immediately integrate its thin-film heads into head stack assemblies and sell the two components as one unit. This first attempt had proved unsuccessful, however, and the company allegedly garnered a $2 million loss in the process. Read-Rite withdrew from the market, regrouped, and founded a new Head Stack Assembly group, headed by Marty Horn and Richard Stubberfield. In September 1991, the group purchased a two-year-old HSA plant in Penang, Malaysia, from Conner Peripherals and also began construction of a new plant in Thailand. Two months later, the group paid $17 million to acquired the Malaysian HSA operations of Maxtor Corp. Given Read-Rite’s existing sales ties with the two companies, the move proved fortuitous and improved competitiveness against Read-Rite’s top rival, Dastek Inc. In the midst of this tremendous growth, Read-Rite went public on the NASDAQ exchange on October 18 at $ 11.50 per share and raised $50 million in its initial public offering.

During this time, personal computer prices plunged and worldwide sales increased dramatically, while use of thin-film head in the disk drive industry swelled from 20 percent in 1990 to 70 percent in 1992. As a result, Read-Rite captured 50 percent of the market, and its sales hit $177 million in 1991. To handle growing demands for its components, Read-Rite began building a new manufacturing facility near its headquarters in the Santa Clara County and also began construction of a manufacturing •facility in Thailand. In September 1992, Read-Rite SMI began production of thin-film heads, two years ahead of projections, and its sales for the year totaled $398 million.

In May 1993, Fred Schwettmann, former vice-president of Hewlett-Packard Co.’s circuit technology group, joined Read-Rite as chief operating officer and president. Schwettmann assumed these posts at a time when the industry was heading towards a major realignment, for which Read-Rite had not been entirely prepared. Read-Rite’s customers in the hard-drive industry had not foreseen a market trend towards newer, high capacity drives, and, as a result, were suffering from a glut of unwanted low-capacity drives. Drive makers began cancelling their contracts with component makers and concurrently put pressure on them to reduce prices. Read-Rite’s net income plummeted 89 percent in the third quarter of 1993 to $1.3 million, down from $12.2 million in third quarter of 1992. Although overall sales climbed from $389 million in 1992 to $482 million in 1983, net income plunged $47 million to hit $884,000, due to this sharp decline in the fourth quarter of 1993.

Sales at Read-Rite continued to fall in the first half of 1994, although the company plcked up several new contracts with leading component manufacturers. During this time, Read-Rite merged its head stack assemblies operations with Sunward Technologies, Inc., a leading producer of rigid disk recording head products, preparing to face growing competition from emerging alternative technologies. Some industry analysts contended that Read-Rite’s financial declines in the early 1990s reflected the company’s failure to anticipate and develop technology for the new high-capacity drives. Others, however, maintained that the declines were simply the result of market cycles, suggesting that the company would report more promising figures once the market realigned itself.