Adaptec, Inc.

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Adaptec, Inc.

691 S. Milpitas Boulevard
Milpitas, California 95035
U.S.A.
Telephone: (408) 945-8600
Toll Free: (800) 934-2766
Fax: (408) 262-2533
Web site: http://www.adaptec.com

Public Company
Incorporated: 1981
Employees: 2,123
Sales: $692.4 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: ADPT
NAIC: 33413 Semiconductor and Related Devices Manufacturing

Adaptec, Inc. is a leader in the manufacture and sale of hardware and software that allow data transfer between computers. The company has a strong share of the market for small computer system interface devices, known as SCSI (pronounced “scuzzy”). These interfaces allow data to move quickly between different computer types and allow computers to communicate with peripheral devices such as printers, scanners, disk drives, tape drives, CD-ROM drives and others. Adaptec also manufactures other technology in the general field of data movement, including advanced networking equipment and software. The firm maintains headquarters in Silicon Valley, in the town of Milpitas, California, with regional offices in Japan and Belgium. A Miami, Florida office oversees Adaptec’s business in Latin America. Adaptec does not own its own manufacturing facilities, but subcontracts through vendors in Taiwan, Singapore, and elsewhere. Some of Adaptec’s customers include major computer manufacturers such as IBM, Dell, Apple, and Compaq.

Beginnings in the 1980s

Adaptec was the brainchild of Laurence Boucher. Boucher had been a computer engineer at a company called Shugart Associates and at leading computer maker IBM. In 1981, at the age of 37, he left IBM to start his own company. As small computers began to get more powerful, Boucher saw a need for technology that would let them swap data with mainframe computers and other devices more quickly. The problem was known as the input/output bottleneck: very fast computers could not work to capacity if they could not get their data—from disk drives, networks, or whatever—at an acceptable speed. Eric J. Savitz, in a profile of Adaptec in the December 3, 1990 issue of Barron’s, described the input/output bottleneck aptly as driving a sports car through Manhattan at rush hour: “Theoretically, you might be able to go 140 miles per hour, but practically, you’re lucky if you reach 10 miles per hour.” Boucher’s company developed semiconductor chips, boards, and software that eliminated rush hour. Adaptec’s technology made quick, flexible communication links between computers and their so-called peripheral devices, meaning printers, exterior drives, and other components that might be linked up to the computer.

Boucher had found a niche for a viable product, and Adaptec grew quickly. After only two years, the company had sales of more than $6 million. Management, sales, and distribution were run out of headquarters in Milpitas, California, while manufacturing and assembly of Adaptec’s semiconductor chips and circuit boards were subcontracted out to factories in Singapore. The company ballooned, finding many customers among other start-up computer companies who appreciated Adaptec’s cutting-edge technology. Yet this initial spurt of growth was not well managed; soon, Adaptec ran into serious financial problems. As the company was just establishing its reputation, it took all the customers it could get to achieve enough sales volume to keep going. As a result, Adaptec ended up pooling most of its sales among three companies. As these were all new ventures, and not particularly stable, this was not a wise strategy. During one disastrous quarter of 1984, all three of the companies that represented Adaptec’s biggest customers ran into difficulties and decided to cancel their orders. Losing these three customers meant fully half of Adaptec’s sales went down the drain. When things had been going well, the company had been casually managed, and it did not seem to matter. But in this crisis, it was clear that Adaptec needed to adopt some basic controls. The company had not been verifying shipments against purchase orders, and it was receiving parts it did not want and running short on essentials. The company had been running without regular production forecasts, so it was virtually impossible to clarify what parts were needed anyway. Finances were out of order, and the company was not getting paid promptly by its customers. It operated without credit checks or credit limits on customers. This sloppiness on Adaptec’s part inadvertently put the company in the position of lending money to its clients—other small companies happy for the break. Early in 1984, Adaptec found itself with inventory on hand worth more than its entire sales for the 1983 fiscal year, and the firm’s cash balance dwindled to only $131,000.

The company had to act quickly to avoid going under. Fortunately, Boucher recently had hired several top executives with experience working at older, established computer firms. A marketing vice-president and sales president came to Adaptec from Intel, and Boucher also hired a chief financial officer who had previously worked at an analytical instrument manufacturer in San Jose, Finnegan Corp. Whereas Boucher was an engineer with keen insight into computer technology, these managers had more business background. They worked literally day and night to turn the company around, first of all by selling off inventory. During the business day, Adaptec sold its excess parts to other area companies, and in the evening, managers attended meetings of local electronics clubs to sell off unneeded controller boards. The company leased out unused testing equipment and extracted more time to pay from its creditors. Because Adaptec did not own its own factories and manufacturing equipment, it had relatively low overhead. It managed to raise enough cash to keep going, without laying off staff. The company began to operate in a more traditional and businesslike manner. It initiated regularly scheduled executive staff meetings to fine-tune production forecasts and began running credit checks on customers and limiting customer credit. It also sought out new customers, so that it did not sell exclusively to young and high-risk companies. Adaptec soon linked up with two national electronics distributors and began selling as well to Texas Instruments, Hewlett-Packard, Sun Microsystems, and other firmly entrenched computer industry leaders.

Because of Adaptec’s quick action, the 1984 crisis passed and the company was left in sound shape. In 1986 the company went public, selling its shares on the NASDAQ stock exchange. By that time, Adaptec had a customer base of more than 300 companies, and no single customer made up more than ten percent of its sales. With a more coherent business plan, growth was manageable, and the company did extremely well. Sales for fiscal 1986 rose almost 80 percent compared with the year before, reaching close to $60 million. Profits also increased significantly, more than doubling. In its crisis year, Adaptec’s inventory turned over less than once, but by fiscal 1986 inventory was turning over 6.8 times a year, almost twice the industry average. The company was thinking ahead, too, spending about nine percent of its sales on research and development and bringing out scores of new products. After the company went public, founder Boucher left. He went to work starting a new company, Auspex Systems. A former IBM colleague, John G. Adler, took over the chief executive position at Adaptec.

Company Perspectives:

Adaptec plays a pivotal role today in satisfying the world’s growing need for more data, more storage, more connectivity. The Internet revolution is increasing demand for access to information. Meanwhile, business applications are more data-intensive and mission-critical. And computers are more and more important to the way people both work and play. We provide products that support information productivity for both businesses and individuals. Our Input/Output (I/O) solutions help move data quickly and reliably into and out of all kinds of computers. Adaptec is the undisputed market leader in high-performance, high-reliability I/O. In addition, our host I/O, RAID, and software products are the preferred solutions for the fastest growing segments of the computer market: Windows NT servers, workstations, and high-end desktop PCs.

SCSI Sales in the Late 1980s

Adaptec manufactured a wide array of microchips and subsystems that allowed computers to communicate with peripherals. One development in the late 1980s. was a card that could be inserted into laser printers both to increase speed and lower costs. Adaptec also made controllers for high-capacity disk drives. Among its products, the most important by 1990 was the SCSI. Sales of SCSI and SCSI-related devices made up 70 percent of Adaptec’s sales by 1990. SCSI had become more important as time passed. Originally, founder Boucher had seen the need for a device that allowed data to bypass the input/output bottleneck, the traffic jam described previously. Yet in the early 1980s, relatively few computers were powerful enough to run into this problem. But as personal computers grew more powerful, Adaptec’s data flow controllers became more essential. In 1986 Apple adopted the SCSI for all of its Macintosh model computers. Several years later, IBM-compatible models were using it, and by 1989, IBM itself had made SCSI standard. Adaptec worked both ends of the market, making the adapter boards that went into computers using SCSI and the so-called protocol chips inserted into the peripheral devices that would then communicate with the host computer via SCSI. By 1990, the company had divided its manufacturing operations into three main areas. The first was systems products, which were the hard-disk controllers, local area network adapter boards, software, and SCSI host adapter boards required by computer manufacturers. The second manufacturing area was peripheral products, which meant the adapters and controller boards used by makers of equipment that networked with computers. Among the company’s most prominent products in this area were its printer controller boards and hard disk controller chips. Adaptec’s third division was for development products, which were components used by makers of both computers and peripherals in testing and developing new products before they went on the market. The biggest and fastest growing of these three product areas was peripherals. It made laser printer boards for the Japanese manufacturers Canon and C. Itoh, and their new printers were considered astonishingly fast. At a trade show in 1990, the company demonstrated how the Japanese printers equipped with the Adaptec card could produce in 30 seconds a complex drawing that normally would have taken 30 minutes.

Changes in the Mid-1990s

Chairman John Adler stepped down in 1995 and left the chief executive position to Grant Saviers. A dozen years after its founding, Adaptec was an enviable company. It had a huge share of the market for its products, burgeoning sales, and a quite comfortable profit margin. Revenues for fiscal 1993 were more than $300 million, and net income for that year tripled from the year before, to $49 million. Its SCSI adapters were able to handle data from as many as 15 peripheral devices at once, allowing computer owners to hook up optical scanners, external hard drives, or multiple printers with great convenience. Its products were in demand, and the company had been profitable quarter after quarter. Yet in the mid-1990s, the company realized its glow might not last, and it began to look ahead to new products.

Adaptec’s laser printer card business had proved unsuccessful, and by 1994 the company was no longer pursuing it. Other manufacturers had tried to get in on the computer communications device market, coming up with new technology they hoped would be better and cheaper. Competitors had come up with other devices, known by impenetrable acronyms, including IDE/ATA and ATA Packet Interface. These were different ways of doing what the SCSI did. But the looming problem for Adaptec was making its SCSI products work with voice and video applications. By 1994, voice and video components made up a very small portion of the computer market, yet it seemed to be the wave of the future. SCSI products could move large amounts of data between computers and peripherals, but the data they handled was not exactly time dependent. For voice and video, all the information had to arrive synchronously or the sound and picture would be garbled. The company poured money into research and development, devoting as much as ten percent of revenues in the mid-1990s to developing new products, particularly adaptations for voice and video.

The company also moved to shore up its product line by making acquisitions. In 1995 Adaptec acquired Power I/O, a small company founded by computer entrepreneur Robert Stephens. In 1996 Adaptec bought Cogent Data Technologies, Inc. in a transaction valued at $68 million. Cogent Data was a privately held company based in Friday Harbor, Washington, and it made a kind of adapter device known as Fast Ethernet. This was a new computer networking technology that seemed to be growing quickly. Acquiring the small company gave Adaptec entry into Fast Ethernet’s markets more quickly than if it had tried to develop its own products. Two years later Adaptec tried to make another acquisition, but soon scrapped the plan. In February 1998, Adaptec offered to pay $775 million for Symbios Logic Inc., a Hyundai Electronics subsidiary based in Fort Collins, Colorado. Symbios made data storage equipment, and its 1997 sales were more than $600 million. However, a review of the merger by the Federal Trade Commission raised antitrust issues, and Adaptec backed out of the deal.

Trouble in the Late 1990s

This was a bad time for Adaptec. By 1997, the market for personal computers had slowed, and with it Adaptec’s sales sank. A few years earlier, Adaptec’s SCSI technology had found a place in approximately 12 percent of desktop computers. In 1997 that percentage was somewhere in the single digits. Premium chip maker Intel had incorporated technology similar to SCSI on its standard product, making Adaptec’s device obsolete on Intel-powered machines. Profits slowed at Adaptec, and sales grew for fiscal 1998 only eight percent, far below the stellar rates of years earlier. The company’s stock began to fall. In late 1997 it had been trading at more than $50. It bottomed out in 1998 at $8. In the summer of 1998, Adaptec’s chief financial officer resigned, and shortly after, the treasurer left. When it was unable to carry through its acquisition of Symbios, the company was at a loss for a new direction, and this led to turmoil. Finally, in August 1998 Chairman and Chief Executive Grant Saviers quit. Apparently, his plan for the company was less conservative than the board wanted, and he left. The position was filled temporarily by Adaptec’s founder, Laurence Boucher. Boucher had launched his third company by that time, but he came back to straighten things out at Adaptec. He announced that the company would shore up its core business, which was still the ailing SCSI. Almost immediately the firm announced layoffs in its storage systems division, and in November it sold its Peripheral Technology Solutions division to STMicroelectronics. This division made controllers for disk drives. Formerly, it had contributed as much as 25 percent of Adaptec’s revenues, but that figure had fallen to about ten percent. The transaction brought Adaptec $73 million. Adaptec got out of its satellite networking business, its fibre channel business, its high-end peripheral technology business, and its external storage business. The company also cut back the amount of money it was spending on research and development.

By January 1999 the company was able to announce better than expected profits for the preceding quarter. Its quick action to cut costs and sever unprofitable product lines had shown results and demand rose again for some of its core hardware and software. Boucher continued to lead the company, while Adaptec found a new president in Robert Stephens, who had been chief operating officer since 1995.

Key Dates:

1981:: Company founded by Laurence Boucher.
1986:: Adaptec goes public.
1989:: IBM adopts Adaptec’s SCSI.
1995:: Company gets new CEO Grant Saviers.
1997:: Company’s sales and stock plummet.
1999:: New CEO Robert Stephens takes helm.

Almost a year later, the company seemed to be returning to financial health. As the stock market continued to prosper, Adaptec’s stock recovered somewhat. The company had promising new products in its so-called RAID (redundant arrays of independent disks) technology. This amalgam of hardware, software, and SCSI products was able to turn a group of disk drives into a powerful data storage unit. Adaptec also had turned itself into the leading supplier of software that let people record compact disks at home. As music from the Internet seemed to be a rapidly growing niche, the company was well positioned to take advantage of this growth. Though sales for fiscal 1999 were more than 30 percent lower than the year previous, there were signs that the company was doing better, particularly with strong fourth quarter sales and net income.