History (1996): SyQuest Vs. Nomaï

SyQuest Technology tried in vain to acquire Nomaï. Since the operation failed, tension between the 2 competitors (along with Iomega) has mounted palpably over the removable cartridge rigid disk and media market.

We won’t rehash the entire history of their squabbles, choosing instead to summarize the most recent developments, as they have been related by both parties and other sources.

The new management at SyQuest wanted to rid itself once and for all of Nomaï, which it sees an annoying rival, with a form of blackmail: either let us acquire your company, or we will take you to court one more time, this time for the illegal copying of our 200MB 5.25-inch cartridge.

Letter of intent
On November 18, the 2 firms signed a letter of intent for the acquisition: “SyQuest would acquire from Marc and Herve Frouin (the founders and main shareholders of the French manufacturer) 674,735 shares of Nomaï, representing two thirds of Nomaï outstanding capital stock, in exchange for 3,441,217 shares of SyQuest common stock.”

Given that SyQuest shares are valued at around $6, the Frouin family would have cleared nearly $21 million on the sale, which seems a fair price for a firm that expects to realize $28 million in sales this year. Not to mention that SyQuest intended to make a tender offer of the remaining Nomaï shares held by the French public. It is rare that a letter of intent doesn’t lead to the final transaction, no matter that the press release concluded with the classic refrain: “The acquisition is subject to the negotiation and execution of definitive agreements, as well as to customary closing conditions … “

At Nomaï Comdex booth, one of the French firm’s representatives didn’t hide the fact that he was looking for a new job. Both companies made a careful audit of the other, and the Frouin brothers flew to SyQuest’s HQs in Fremont, CA for final talks.

And then letter of … rejection
On November 25, a dramatic twist: a furious SyQuest announced that Nomaï had attempted to alter substantially the terms of the acquisition reached in the letter of intent, which consequently reneged on the deal of the prior week.

“SyQuest has previously obtained a court judgment vs. Nomaï for infringement of intellectual property rights,” stated the US firm.

The company added it will take aggressive legal action to protect such property rights and otherwise to enforce its claims vs. Nomaï, Nomaï announced the following day that it had formally rejected the purchase offer.

“Following a week of marathon financial, technical and corporate due diligence and negotiations,” said Nomaï. “It became evident to Nomaï’s majority shareholders that the terms proposed by SyQuest were unacceptable.”

Added Marc Frouin: “It was impossible to come to an agreement with SyQuest due to its depressed stock price and the current state of their business.“

The hatchet has thus been dug up again, with SyQuest in position to defend its patents, and no doubt also preparing to sue Nomaï for breaking with the letter of intent that indicates Nomaï shall pay a fee of $2 million if the company breach certain conditions.

The “unacceptable” conditions
It’s hard to believe that the Frouin brothers weren’t already well aware of the poor financial showing of public company SyQuest, which recorded losses of $211 million vs. sales of $282 million for the first semester of this year.

In the end, it seems that the French founders of Nomaï stuck on 2 of SyQuest’s conditions they curiously accepted and signed: 1) in spite of the fact that together and individually they would become the largest shareholders of SyQuest, with nearly 22% of the stock (as opposed to the roughly 5% of the next largest shareholder}, SyQuest forbid them from joining the board of directors within the first 9 months after the sale; 2) the Frouin brothers could not sell in the next 3 years SyQuest’s shares they would receive.

SyQuest’s situation is currently so precarious that it is not at all certain the firm will be around a few months from now. The Frouin brothers thus ran the risk of losing everything from the deal, literally from one day to the next, and without having any power to influence certain of the company’s decisions.

True, on November 18, the day the letter of intent was announced, SyQuest had just concluded an $8.5 million offshore transaction with Fletcher International Limited, an investment firm, which pledged to buy 1,500,000 shares of SyQuest at $5.6875 per share. True also that Ed Marinaro, SyQuest’s COB said that his company has received a total of $70 million in equity investments since mid-summer. And true, once again, the company had previously restructured $38.5 million of debt into notes-payable, ranging in duration from 12 to 36 months.

But will any of that be enough? Currently, SyQuest is running down its stocks of 5.25-inch and 3.5-inch EZ135 drives, and has virtually only one device left to sell, the EZFlyer 230, whose profit margin has shrunk considerably, given that the price has plummeted nearly 20% since November 4.

The SyJet, a 2-platter 3.5-inch removable cartridge drive, saw its release delayed, with revisions and adjustments. This product is only just arriving on the scene, taking on Iomega’s Jaz, which has had a decent headstart.

The future of SyQuest
As best we can judge, SyQuest’s whole future depends on one question: can the firm hang on until March of 1997, when it is supposed to launch a removable cartridge drive with exceptional specs, a product which should help it in its uphill struggle. The device was demonstrated in a small room off one side of the company’s booth at Comdex.

The somewhat unseemly, if not outright embarrassing letter-of-intent episode has somewhat tarnished the images of both firms. Each company conducted a full audit of the other; never before have 2 competitors taken such a close look at one another. One wonders whether one of the parties did not sign the letter of intent with the sole purpose of examining the books of the other. One never knows… Nor does Nomaï come out of this squeaky clean. We learned that the French firm manufactures the majority of the 3.5-inch cartridges for… SyQuest’s EZ 135, which only goes to show that Nomaï’s manufacturing costs are lower than those of its rival.

But will SyQuest continue in the future to seek supplies from its worst enemy? According to a Nomaï spokesperson, the French firm reached an accord with SyQuest that provides for the manufacturing of 5.25 inch cartridges of 44 and 88MB (but not of 200MB) with the payment of royalties to SyQuest through December 31, 1995, and without royalties after that.

An near agreement was reached for 3.5-inch cartridges last March based on a common standard, the PDC, for 135, 230, 270 and 540MB single disks and beyond.

It’s well known that the US firm survives principally on its returns from the media, and furthermore, is not likely to sit back contentedly and watch its competitor grow larger and stronger.

Nomaï spokesperson informed us that the firm had manufactured 60,000 cartridges (3.5 and 5.25-inch combined) in March 1996, 120,00 his past September. 120,000 is again cited for November’s business, with a goal of 300,000 units by next March.

“Never take your eyes off the ball”
We conclude with the words of Leon Malmed, who was approached at Comdex on the subject of the latest skirmish. Malmed, formerly SyQuest’s VP marketing, is now SVP marketing and sales for SanDisk, and simultaneously a member of Nomai’s advisory board.

“Four years ago, at SyQuest, we had an acquisition plan for Nomaï which should have been carried out. Since then, the 2 companies have spent, together, 3 or 4 times the asking price of Nomaï at the time in lawyer’s fees and court costs, without taking into account the considerable energy expended. During all that time, the competition (Iomega, in other words -Ed.) had a field day. Like a tennis player, a company must never take its eyes off the ball.”

This article is an abstract of news published on the former paper version of Computer Data Storage Newsletter on issue 107, published on December 1996.