It is probably this sense of partnership -- of teaming up to go after a common goal -- that is driving the trend. Most young companies, after all, would prefer to work with an investor concerned with long-term product development and corporate strategy rather than one interested mainly in cashing out at a decent multiple. "Working with a real partner on real products changes everything," Finis Conner says. "With this kind of alliance, you don't run wild. You don't run for the short-term killing. You run it for the long run, for yourself and your partner. And that's how it should be."
* * *
Research assistance was provided by Elizabeth Conlin.
NATURAL PARTNERS
CONNER PERIPHERALS INC.
Headquarters San Jose, Calif.
Type of business Disk-drive maker
Founded June 1985
Date of partnership June 1986
Revenues at time of partnership $0
Relation to partner Supplier
Purpose of deal Start-up funding
COMPAQ COMPUTER CORP.
Headquarters Houston
Type of business Personal computer manufacturer
Revenues at time of partnership $625 million (FY 1986)
Relation to partner Customer
Purpose of deal Source of advanced disk drives
SLZRCO PARTNERS
Headquarters Monrovia, Calif.
Type of business Seltzer-water bottler
Founded 1983
Date of partnership June 1984
Revenues at time of partnership $0
Purpose of deal R&D funding
MCKESSON CORP.
Headquarters San Francisco
Type of business Wholesale/distributor
Revenues at time of partnership $4.3 billion (FY 1984)
Relation to partner R&D partner
Purpose of deal To capture sparkling-water market share
GIGABIT LOGIC INC.
Headquarters Newbury Park, Calif.
Type of business Semiconductor manufacturer
Founded 1981
Date of partnership April 1987
Revenues at time of partnership Not available
Relation to partner Supplier
Purpose of deal Equity investment
CRAY RESEARCH INC.
Headquarters Minneapolis
Type of business Supercomputer manufacturer
Revenues at time of partnership $687 million (FY 1987)
Relation to partner Customer
Purpose of deal To ensure supply of gallium-arsenide chips
THE STRUCTURE OF A DEAL
The Compaq-Conner Peripherals 'natural partnership'
The natural partnership between Compaq Computer Corp. and Conner Peripherals Inc. was always about more than money, but money certainly played a role. Under the terms of the 1986 deal, Compaq received 49% of Conner's stock for two $6-million investments. Equally important to both companies was the joint-development agreement, which outlined how they would work together on the new disk drives. Using software microcode instead of mechanical parts, the new drives proved easier to customize, cheaper to build, simpler to test, and more reliable than previous models. So happy was Compaq with the results that it accounted for 89% of Conner's sales in 1987, its first year of production.
That was a mixed blessing for Conner. The danger was that other potential customers would be scared off, undermining Conner's ability to establish itself as an independent company. "There was concern about the Compaq share of the company," Conner admits. "It was hard to convince [our other customers]. We were lucky that no one else had a drive with our format."
But both Compaq and Conner were determined to avoid a subservient, Japanese-style subcontractor relationship and took steps to allay the fears of other potential customers. Although Compaq initially had directors on Conner's board, a strong legal agreement ensured that Compaq would not have access to sensitive information picked up in negotiations with other potential customers, many of whom are Compaq's direct competitors. (The board members from Compaq have since resigned from their Conner seats.)
With Rod Canion's approval, Conner worked hard to diminish Compaq's stake in the company. In that, ironically, he got help from venture capitalists, who responded to the company's first-year success by offering money on terms that Conner and his team found acceptable. In August 1987 a group of venture firms put $27.5 million into the company. In April 1988 the company went public, raising an additional $42.5 million through stock sales. In the process, the Compaq share of the company dropped to 41%. Yet Compaq still plays a crucial role in preventing the kind of venture capital domination feared by Conner. With about 20% of the company in the hands of employees and officers, institutional venture funds now own less than one-fifth of the stock.
Meanwhile, Compaq's share of Conner's production dropped to 47% in 1988, as concerns of other customers abated. Among Conner's major customers are such fierce Compaq competitors as NEC, Zenith, Toshiba, and Olivetti. Several of them also have product-development deals with Conner, and Olivetti has a European-based joint venture. "We believe in fathering products with customers," Conner says. "So these alliances will continue to make sense for us, even as we grow into a larger and more independent company."
