The ramifications of small high-tech companies looking to Japan to fund their development.
Why some smart companies are selling out to the Japanese
Developing cutting-edge technology costs a lot of money, and many of America's most innovative companies are running out of it. So what do they do? They give up a piece of the action to the Japanese for a chunk of capital. Why are small companies increasingly looking to Japan for their money? And what does it mean for the rest of us? -- E.D.W.
Tazz Pettebone wheels his Ford Bronco into the freshly paved parking lot, hops out, and heads for the door to see how things are coming on the new building. Outside, it is a warm, dreamy November day in Silicon Valley. Inside, ductwork and insulation glint through the shadows as the hum of power tools resonates off the freshly poured concrete floor. Pettebone looks around appreciatively and says, "We'll move in here in January."
Pettebone is president and chief executive officer of Akashic Memories Corp., in Santa Clara, Calif., widely recognized as a technologically advanced maker of thin film magnetic disks for computer data storage. With this move the company will more than double its manufacturing capacity. It recently signed a 10-year lease for the space, with options to stay beyond that. In a glutted real-estate market, where one-year leases are the norm and landlords routinely dangle all manner of improvements before choosy tenants, Akashic clearly intends to be a long-term player.
The scene is as affirming as the day's Indian summer warmth: American entrepreneurial know-how building long-term value from little more than the germ of an idea. But a closer look reveals a flaw in the scene, a disquieting disjunct between historical expectation and present-day predicament.
Akashic Memories was once an American company. Starved for cash two years ago, it was bought outright by a $5.5-billion Japanese multinational. "We needed the money -- absolutely," says Pettebone. "This is a technology-driven business. It's very capital intensive. If you don't invest, then you quickly fall behind." Akashic's acquirer not only paid $20 million for the company in December 1987, but has invested another $55 million since then.
That acquiring company, contrary to what you might expect, is not an electronics giant. Akashic's owner is Kubota Ltd., a 100-year-old company whose core business is farm equipment. Kubota bought Akashic as a means to shuck its heavy-metal chrysalis and take wing as a brave new competitor in the global economy of the twenty-first century. Kubota knew that farming was a mature business. Computers, not combines, promised growth.
Kubota's aim five years ago was to become a major force in technology. It would buy into an array of state-of-the-art, early-stage American technology companies. It has already spent $200 million to accomplish that task.
Kubota's major thrust is to become an integrated manufacturer of high-powered workstations, the fastest-growing part of the computer business. This is the market that turned Sun Microsystems Inc. into a $1-billion company in six years.
Aside from Akashic, Kubota has made the following other high-tech investments:
* $50 million for 44% of Ardent Computer Corp., in Sunnyvale, Calif., a hot new maker of graphics and departmental supercomputers. (Ardent Computer later merged with Stellar Computer Inc., giving Kubota a 22% interest in Stardent Computer Inc., the combined entity.)
* $26 million for about 20% of MIPS Computer Systems Inc., also in Sunnyvale, a front-runner in the development of the RISC-based microprocessor -- which goes into Stardent machines. (Stardent's chairman, Allen Michels, introduced MIPS's CEO, Robert Miller, to Kubota when his company was foundering for lack of capital.)
* $10 million for a 15% share in Rasna Corp., in San Jose, Calif., a start-up software firm that writes sophisticated mechanical engineering programs -- which will run on the Stardent machine
* $6 million for 9.2% of Exabyte Corp., in Boulder, Colo., a maker of high-capacity cartridge tape subsystems for data storage
* $12 million for 25% of an optical storage joint venture, Maxoptix, with disk-drive maker Maxtor Corp., in San Jose.
"They came and found us," is how Tazz Pettebone describes Kubota's purchase of Akashic. In 1985 Kubota engineers began studying thin film magnetic-disk technology with an eye to in-house production. Their research turned up Akashic and four other U.S. companies pursuing the same technology. Growth through acquisition proved the path of least resistance. Not only was the yen strong against the dollar, but buying into an American company gave access to the U.S. market, the world's largest. "There was some mutual wooing on the part of our venture capitalists," adds Pettebone. "We were running out of money, and our venture capitalists were not prepared to go into deep funding."
Pettebone's story is commonplace in Silicon Valley these days. The script reads something like this: hot technology company, started by U.S. venture capital, burns through its start-up money. Cash-heavy Japanese company offers what appears to the Americans as a premium price. To the Japanese, with their robust currency, the price seems cheap. Everyone is happy. Entrepreneur gets much-needed capital. Venture capitalist -- burned by recent mediocre investments in high technology -- gets a hefty boost in valuation. Japanese behemoth gains access to a vital technology, easing the process of a long-term strategic repositioning of the company.
Tazz Pettebone, not surprisingly, has kind words to say about his Japanese managers. Yes, they sit on the board. No, they don't meddle. Their financial people haven't come in and turned the place upside down, something that often happens with these deals. "They really do their homework," says Pettebone. "They ask the tough questions." He even likes the sense of mystery the relationship has brought. The mastermind behind Kubota's computer acquisition program is a Mr. Yoshida. He sits back in Osaka, calling the shots. Pettebone sees him infrequently. They are slowly getting to know each other; the two men share a passion for the game of golf. (Kubota has also moved into the business of constructing and owning of golf courses in Japan.) What kind of a man is Mr. Yoshida? Pettebone ponders the question, then offers a confiding, appreciative smile. "He's a gambler. He's very shrewd."
