In 1981, Microcomputer Systems Corp. departed from its intended form by acquiring, rather than spawning, a third holding -- wayward Xebec Systems Corp. The troubled 12-year-old disk controller, a product of venture capital gone wrong, was then on the verge of Chapter 11. Even though Xebec's technology was outmoded and its business was shrinking faster than a $2.98 T-shirt, MSC saw it had much to offer: for one thing, a net operating loss running to seven figures, half of which was brought down to the acquirer's bottom line. More to the point, with an extensive customer list and a still-recognized name in the industry, Xebec also provided a vehicle for beinging out controller advances in a hotly contested market -- low-cost Winchester 5 1/4-inch disk drives. MSC peeled off $50,000 and bought a market share potentially worth $100 million. Within nine months Xebec was grossing $600,000 a month. "Their product had been basically junk," explains James S. Toreson, MSC's founder, with the justifiable smugness of one who has KO'd a competitor by dint of superior engineering.
"Their company had several million dollars of venture capital poured into it, and we had none in ours, but we ultimately too them over with our technology." But the turnaround was not quite the piece of inspired management it seems. MSC revived Xebec, Toreson admits, by selling it a license to a patent that MSC had taken out previously but had not yet used. With personnel already in place, Xebec simply developed the patented product. The gambit worked so well that Xebec has become the first of the MSC companies to declare itself ready for outside investment.
Unless a company can keep up with constantly shifting technologies and the markets that come and go within them -- unless it can "rock and roll," as Toreson puts it -- there is a danger of peaking and then being passed by. If the company does latch on to an expanding market, it has to shore up its position with more capital. Right now, for example, Xebec claims to have about 80% of its market, but it is a market undergoing head-spinning growth. Xebec will need much more money shortly because, as Toreson says, "everybody and his dog" is going after it. Capitalism has played by these rules for centuries, he explains. If you own 80% of a stagnant market, nobody cares. But if it is 80% of a $200 million marketplace with the end still not in sight, "a lot of guys want to go in there after your hide, and the guys that are coming in are heavily capitalized. That's the problem."