Cipher Data Agrees to Talk to Rival Company : Takeovers: Turnaround announcement comes three days after tape-drive manufacturer rejected Archive.
In an apparent softening of its resistance to an unsolicited tender offer made last month by Archive Corp., Cipher Data Products has agreed to negotiate terms of a confidentiality and “standstill” agreement with Archive, a possible prelude to talks concerning a friendly merger agreement between the two companies.
Confidentiality and standstill agreements are those by which companies agree to exchange non-public information under the condition that each party not take unfair advantage of the information, including buying the other’s stock under certain circumstances. Archive already owns a 4.6% stake in Cipher Data shares.
The announcement came three days after the board of San Diego-based Cipher Data rejected as inadequate a $7.50-per-share tender offer made Dec. 19 by Costa Mesa-based Archive. Also on Friday, Cipher Data said it had retained First Boston Corp. to explore “alternative transactions,” including a merger with another company, to boost its stock price.
Archive and Cipher Data are rival manufacturers of tape drives, a computer data storage device used to back up hard-disk drives.
Cipher Data also disclosed Friday that Archive had “indicated” Jan. 4, one day before Cipher Data was required by Securities and Exchange Commission rules to respond to the Archive tender offer, that it might agree to raise the price of its offer to $8 a share.
Describing Archive’s possible higher bid as “belated, informal and conditional,” Cipher Data’s board responded only to the $7.50 offer, turning it down.
But on Monday, Cipher Data said it told Archive on Sunday that it was “willing to entertain Archive’s request” to “consider an $8-per-share negotiated transaction.” Those discussions, however, were contingent on the approval of confidentiality and standstill agreements, Cipher Data said.
“In a letter we sent to Cipher, we suggested that the companies meet on a friendly basis and negotiate something,” said B.J. Rone, Archive’s vice president of finance. “What we are doing is looking at the possibility of having such a meeting, and before you do that, you set some ground rules.”
In its statement Monday, Cipher Data said there was no assurance that the negotiations with Archive would lead to the confidentiality and standstill agreement, “nor as to what the outcome might be if any such agreement is or is not reached.”
Rone described Archive’s $7.50-per-share offer as a “full and fair price,” stressing that Archive was not officially raising its tender offer to $8 a share. Cipher Data executives did not return telephone calls Monday for comment on the tender offer, which expires Jan. 22.
“The offer could evolve into $8 a share, but we aren’t guaranteeing $8 a share,” Rone said. “We have requested a meeting where they could go through why they think $7.50 is unfair.”
Analysts speculated Monday that Cipher Data’s willingness to sit down with Archive so soon after asking First Boston to solicit other offers could mean that no better deals are available.
“I think it tells you there aren’t a lot of offers on the table,” said Russell Crabs, an analyst with SoundView Financial Group of Stamford, Conn.
“It seems to be diametrically opposed to what they said on Friday. It seems peculiar that they didn’t give First Boston a chance to shop around for a better price,” said Irving Katz, director of research at Thomas Green/San Diego Securities of San Diego. “Maybe Archive somehow or other got to (Cipher Data) management, and said they would raise their offer if they could talk.”
Analysts also said Cipher Data’s attractiveness to potential buyers was damaged by the company’s disclosure Friday that it expects to report a loss of $11 million to $12.5 million, exclusive of certain expenses incurred as a result of the Archive offer, for the second quarter that ended Dec. 31. Cipher Data reported a $14.2-million loss for its first quarter.
Meanwhile, Cipher Data has filed suit against Archive alleging patent infringement. In fact, some observers have said that Archive’s takeover attempt could be a means of avoiding the financial impact of an unfavorable judgment in the patent suit.
In addition, Archive filed suit against Cipher Data last month, attacking its anti-takeover defenses. In an amendment to the suit filed Monday, Archive accused Cipher Data of illegally failing to disclose to its shareholders that it had offered to accept as settlement of its patent-infringement suit against Archive a cash amount of $5.5 million and royalties of 2.5% on certain products sold by Archive over a seven-year period.
Confident that it will win the patent suit, Archive declined the settlement offer, an action that Cipher Data shareholders should have been informed of, Archive’s Rone said.
The negotiations for the confidentiality and standstill agreement, however, prompted the two companies to defer until 5 p.m. today the taking of depositions that were scheduled to begin Monday in litigation between the two manufacturers.
Archive also disclosed Monday that the Federal Trade Commission had requested information from Archive on the antitrust implications of a merger with Cipher Data. According to Freeman Associates, a Santa Barbara-based research firm, market leader Archive now controls about 25% of the cartridge tape-drive market, with No. 2 Cipher Data claiming about 20% of all cartridge tape-drive sales.
