Western Digital Will Buy Tandon’s Hard-Disk Manufacturing Business : Seen as Move to Broaden Computer Products Line

In a move to broaden its fast-growing line of personal computer products, Western Digital said Monday that it has agreed to buy Tandon’s hard-disk manufacturing business for nearly $80 million.

The Irvine-based computer products manufacturer agreed to pay Tandon $40 million to $45 million in cash and equipment and to pay off $34 million in debts that Tandon owes its suppliers.

Chatsworth-based Tandon, which will become almost exclusively a personal computer maker after it sells its disk-drive operations, said $12 million of the cash it receives will be used to repay existing loans from Western Digital.

The sale effectively removes Tandon from a business that made it one of the personal computer industry’s best-known suppliers in the early 1980s. The company now will be primarily a personal computer manufacturer.

Yet Another Expansion

For Western Digital, the acquisition represents yet another expansion of its personal computer equipment line. The company is the industry’s leading supplier of hard-disk controllers, the circuit boards that control the functions of disk drives.

Hard-disk drives are devices used in personal computers to store data on rigid platters that are 5 inches or 3 1/2 inches in diameter.

Western Digital has been buying hard-disk drives manufactured by Tandon and other suppliers to combine with its disk-drive controller boards. It then sells the finished hard-disk assemblies to personal computer makers and retail outlets.

Western Digital, Orange County’s largest electronics manufacturer, also makes circuit boards to control the video display and communications functions of personal computers.

A relative unknown only a few years ago, Western Digital grabbed the industry’s attention last October by introducing a broad range of products for IBM’s new Personal System/2 computers.

Key to Cloning IBM

Included among those products was a line of semiconductors that duplicate the operations of IBM’s Micro Channel, a communications pathway inside some of IBM’s new personal computers. Computer specialists believe that duplicating the functions of the Micro Channel could be the key to “cloning” the IBM machines. Rumors of a possible acquisition of Tandon’s disk-drive business by Western Digital began circulating in August, when the two companies revealed that they were discussing a joint manufacturing and marketing venture.

In early November, Western Digital and Tandon announced the formation of a Singapore-based joint venture to manufacture 3 1/2-inch hard-disk drives.

“Western Digital had denied they had any interest in operating a disk drive company,” said Jay Vleeschhouwer, an analyst with L. H. Friend & Co. in Los Angeles. “But it makes sense. It’s always easier to own something entirely than to operate it in a joint venture.”

Western Digital Chairman Roger W. Johnson said his company wanted more control over its disk-drive operations than it could have in a joint venture.

“We can probably have a lot more control over the design, manufacturing and quality if we do the whole thing ourselves,” he said.

Fastest-Growing Segment

The acquisition gives Western Digital a piece of the action in the fastest-growing segment of the computer data-storage market: 3 1/2-inch disk drives. The smaller hard disks are used in machines made by such manufacturers as Apple, Compaq and IBM.

The total market for Western Digital’s current data-storage product lines is less than $900 million a year, while the market for 3 1/2-inch drives is about $2 billion and is estimated to exceed $4 billion by 1990, said Kathryn A. Braun, the company’s vice president and general manager of storage products.

“The product they got is a good one,” said Karen Payne, an analyst with Butcher & Singer, a Philadelphia brokerage.

“Financially, it’s probably a good move for both companies,” Payne said. She said Western Digital had $40 million in reserve as of late September and can use the cash to help finance a major portion of the acquisition.

Johnson disagreed with suggestions by one industry observer who said Western Digital may have paid too much for the Tandon business. Tandon’s assets are valued at about $51 million.

Sales of $30 Million

“Tandon is shipping just under $50 million a quarter, or about $200 million a year,” Johnson said. “We didn’t buy the business to keep it (sales) flat. I don’t think paying $40 million to $45 million for a $200-million business is too bad.”

Tandon’s disk-drive business recorded sales of about $30 million for the quarter ended in September. According to Western Digital’s Braun, however, the figure doesn’t include the drives Tandon manufactures for use in its own personal computer line.

As part of the deal, Tandon has agreed to purchase nearly all of its disk-drive products from Western Digital for two years.

The deal, which is expected to be completed early next year, reflects another sweeping move by Tandon’s founder, chairman and chief executive Sirjang Lal (Jugi) Tandon.

In an interview, Sirjang Tandon acknowledged that the sale was largely intended to ease the company’s financial strains as it expands further into personal computer manufacturing. As of Sept. 30, the company had only $8.6 million in cash.

Decision Not Surprising

Industry executives said they were not surprised by Tandon’s decision because the company appeared to lack the money required to sustain both the personal computer and disk-drive businesses.

“I would think that you probably can’t do both,” said Alan F. Shugart, chief executive of Seagate Technologies, a Scotts Valley disk-drive maker.

Q.T. Wiles, chairman of MiniScribe, a Longmont, Colo., maker of disk-drives, said it also has been difficult for Tandon to sell disk drives to personal computer makers when the company is competing with them by selling its own personal computers.

“It’s a major conflict that limits very much who you can sell to,” Wiles said.

The disk-drive business is considered highly competitive. Most hard-disk drives are manufactured in Singapore, where parts and labor are cheaper than in the United States.

Tandon, which flourished in the early 1980s selling floppy, or flexible, disk drives, largely shifted into the manufacture of the more powerful 3 1/2-inch, hard-disk drives.

Negligible Sales

Tandon retains the rights to one disk-drive product, a removable drive that it launched and promoted with a publicity splash earlier this year, but which has had negligible sales.

Nearly 75% of Tandon’s $258.9 million in sales in the nine months ended Sept. 30 came from personal computers.

Tandon’s move into the personal computer business has had mixed results. In late 1985, Sirjang Tandon hired four former IBM executives who helped build IBM’s successful personal computer. But three of the four executives have since resigned.

The company’s personal computers have been well received in Europe, which accounts for more than two-thirds of the company’s computer sales. But Tandon’s personal computer has not made much of a dent domestically.

In over-the-counter trading Monday, Tandon was unchanged at $1.625. Western Digital closed at $12.25, up 25 cents on the American Stock Exchange.

WESTERN DIGITAL AT A GLANCE

Western Digital is an international manufacturer of computer and communications equipment based in Irvine. The company said Monday it has agreed to buy Tandon’s hard-disk manufacturing business for nearly $80 million. As part of the transaction, Tandon will buy nearly all of its disk-drive products from Western Digital for at least two years. Year ends June 30

(in millions) 1987 1986 1985 1984 1983 Revenue $462.5 $300.3 $189.2 $118.2 $51.0 Net income $48.2 $23.2 ($4.2) $6.1 $.424

Assets $307.8 million

Number of employees 3,338

Shares outstanding 25.8 million

52-week price range $32.625-$12.00

Monday’s closing price (Amex) $12.25, up $.25

Chief executive Roger W. Johnson