Maxtor Corporation

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Maxtor Corporation

211 River Oaks Parkway
San Jose, California 95134
U.S.A.
(408) 432-1700
Fax: (408) 432-4510

Public Company
Incorporated: 1982
Sales: $1.4 billion
Employees: 8,900
Stock Exchanges: NASDAQ
SICs: 3572 Computer Storage Devices

Maxtor Corporation is one of the world’s leading manufacturers of computer disk drives. Along with Conner Peripherals, Quantum Corporation, Seagate Technology, Western Digital, and Micropolis, Maxtor shares in dominating the 1.8 to 5.25 magnetic and optical disk drive market. However, due to the cyclical nature of the disk drive market, a failure to introduce new products in a timely fashion, and poor management decisions, Maxtor has been plagued by severe financial problems for most of its existence.

Established in 1982 by a group of computer and computer-marketing whiz kids, Maxtor was soon dominated by co-founder James McCoy, who became the central figure in Maxtor’s early development and success. McCoy, who had held positions at Verbatim and Exabyte and had been a marketing manager at Shugart Corporation and a vice president at Quantum Corporation, possessed valuable experience in the computer storage device industry. He immediately set out to make Maxtor a leader in the magnetic disk drive market by engineering and manufacturing 1.8-inch (105MB) to 5.25 (1.2GB-1.7GB) Winchester magnetic disk drives.

The company’s sales increased rapidly and soon Maxtor was competing with the biggest names in the computer disk drive industry. By 1984, it was in direct competition with Seagate Technology over the introduction and market share of high-capacity 5.25-inch Winchester rigid-disk drives. However, the competition took place in the realm of company press releases rather than in the marketplace. Seagate, the originator and leading manufacturer of 5.25 Winchesters, boasted that it would soon introduce the ST412 High Performance interface, which would make it easier for high-volume computer manufacturers to enhance their disk drives in a shorter period of time. Maxtor responded by publicizing that it would soon introduce its Enhanced Small Disk Interface, which would transfer high-rate data in large memory systems. With the demand for 5.25 high-capacity Winchesters increasing, it seemed as though the first company to ship its product in volume would be declared the victor.

Yet even with such high stakes, Maxtor could not avoid delayed production shipments of the high-capacity 5.25 Winchesters and allowed Seagate to reach the market first with its product. Maxtor’s shipment problem originated with its decision to contract Read/Rite Corporation, a components manufacturer and supplier for the computer disk drive industry. Read/Rite was experiencing financial, production, and management difficulties that prevented the company from supplying Maxtor’s order according to the schedule stipulated in the contract. As time elapsed, and no product was yet in sight, Maxtor began to suffer severe financial losses. Once the management at Maxtor ironed out its problems with Read/Rite and contracted other suppliers, the company reversed its losses.

From 1985 through 1987, Maxtor held undisputed dominance in the disk drive market above 100MB. The company’s gross profits, which approximated 19 percent of total revenues, jumped to nearly 30 percent by the end of 1986. During these years, Maxtor had developed into a market leader primarily because it was able to identify industry trends quickly and improve its manufacturing efficiency. These two factors gave the company an edge over its closest competitors. However, after 1987, Maxtor’s success began to unravel once again. Manufacturing problems with its most recent SCSI and ESDI drives plagued the company, and an increase in both domestic and foreign competition crowded the disk drive industry. Compounding the company’s problems was the retirement of almost all of the founding management, and the discontinuity in both strategy and financial management that this departure caused.

By the middle of 1988, Maxtor was losing its market position within the industry. The company’s continuing dependence on five-year-old products, its inability to solve its supplier problems, and its involvement in a price war contributed to plunging profits. At the end of the fiscal year, Maxtor’s gross profits had dramatically decreased to a mere 3.4 percent of total revenues. Yet the new president and chief executive officer of Maxtor, a 17-year management veteran of Advanced Micro Devices named George M. Scalise, was optimistic that economies of scale in manufacturing products could return the company to the profitability of earlier years.

Initially, the new CEO’s strategy seemed to work; manufacturing efficiency began to generate much needed cash for Maxtor’s research and development program. In 1988, Maxtor sold approximately $300 million worth of conventional hard disk drives alone. One year later, with the little cash he had on hand, Scalise decided to challenge both Sony and Matsushita by manufacturing an optical disk drive that could put one billion bytes—the equivalent of 2,800 floppy disks—on one optical disk the exact 5.25-inch size of most floppy disks. In one move, Maxtor planned to exceed by more than half the capacity of competing disk drives manufactured by the Japanese computer giants. The optical disk drive was attractive for a number of reasons: it featured high storage capacity, it was erasable, and it was as easy to remove as a regular floppy disk, a feature no hard disk drive had at that time.

Following this bold move, Scalise entered into an agreement with Kubota Corporation of Japan to jointly acquire and manage Maxoptix Corporation, a California-based manufacturer of optical storage devices. During this time, Maxtor also purchased MiniScribe Corporation, a disk drive manufacturer located in Colorado. The acquisition of MiniScribe brought Maxtor two foreign subsidiaries, but the company was insolvent and required a huge outlay of cash by Maxtor. Despite the possible financial trouble these new ventures might bring to a company with a severe cash-flow problem, Scalise pointed with pride to an unbroken string of 13 profitable quarters under his leadership. At the end of 1990, management was proud to report a $10.8 million profit for the year.

Yet the storm clouds that had been gathering during Scalise’s tenure as CEO suddenly let loose a torrent of problems. Maxtor, which had been the leader in the high-capacity 5.25-inch disk drive market, lost its position because of production delays with its Panther series of subsystems. Micropolis replaced Maxtor as the new 5.25-inch market leader, and intense competition from such companies as Seagate and Hewlett-Packard contributed to the company’s eroding market share. At the same time, nearly 15 engineers who worked on the Panther development team resigned from their positions, citing mismanagement of the project. This turn of events led to a further delay in production of the Panther series of subsystems.

In addition, Maxtor’s acquisitions were soon found to be not as profitable as Scalise had first thought. After a very short time, Maxtopix, the joint venture between Maxtor and Kubota, was running its operations in red ink. The optical drive program, the pet project that Scalise had hoped would make Maxtor the preeminent disk drive manufacturer in the industry, also experienced production delays. Maxtor’s purchase and consolidation of MiniScribe, which the company had counted on to help improve its cash flow, took twice the amount of money that management initially anticipated. The combined problems of large staff defections, components shortages, production delays, and intense competition both in the international and domestic markets led to a loss of $65.7 million in fiscal 1991.

Scalise resigned in January of 1991, after receiving a poor performance review by Maxtor’s board of directors. Scalise, and most of the upper-level positions that he had filled upon his arrival at the company, were replaced by many members of the old management team, including James McCoy. McCoy was immediately appointed chairman of the board, and Lawrence R. Hootnick, a former president of the embedded controller and memory division at Intel Corporation, was chosen as the new president and chief executive officer. Together McCoy and Hootnick devised a strategy to stop Maxtor’s financial hemor-rhaging by introducing new products and by selling some of the firm’s assets.

Maxtor’s new management quickly introduced Tahiti II, the company’s 1-gigabyte erasable optical disk drive. It followed with a new product line of Apache disk drives for Apple Computer’s PowerBook notebook, and shortly thereafter offered a line of new disk drives for NetWare local area networks. Maxtor then sold its assembly plant in Malaysia to Read/Rite Corporation for $17 million, and placed on the market its Storage Dimensions Inc. subsidiary, a manufacturer of optical and magnetic subsystems. The company laid off 140 domestic workers and permanently eliminated approximately 130 positions at its manufacturing plant in Singapore. Through what McCoy and Hootnick described as an aggressive strategy to reduce costs, control inventory, and manage the company’s cash flow, Maxtor recovered from its financial difficulties and headed for profitability. By the end of the new management’s first year, Maxtor had turned a profit of $4 million.

In 1992, Maxtor celebrated its 10th birthday by surpassing the billion-dollar mark in total revenues; the company reported an $89 million profit on revenues of $1.40 billion, a complete turnaround from just two years earlier. This dramatic change of fortune was partly caused by the improvement in the disk drive industry and the growing demand for disk drives geared toward Windows applications. However, management also took the appropriate measures to build upon its core business, improve its quality control, and provide better service to customers. Maxtor’s No Quibble service plan guaranteed that it would replace a customer’s disk drive in less than 48 hours. At the same time, Maxtor introduced new products such as drives for high-end personal computers and high-end notebooks. The company also increased its quarterly research and development budget from a mere $5 million to just over $29 million. Finally, in an effort to financially strengthen the company, management sold its Storage Dimensions subsidiary to a private investment group for a $4 million note, $18 million in cash, and a 30 percent interest in the company.

According to every economic indicator, Maxtor was back on track. During the first half of fiscal 1993, sales increased almost 50 percent and net income jumped to $66 million, compared to the same period a year earlier. Yet the past acquisition of MiniScribe came back to haunt the company. The purchase and subsequent merging of Maxtor’s and MiniScribe’s operations were executed poorly, and continued to drain the company of cash that needed to be spent elsewhere. Combined with an unexpected pricing war, these financial difficulties resulted in Maxtor’s revenues dropping 24 percent and a net loss of over $72 million for the first quarter of fiscal 1994.

With Maxtor in such a precarious financial situation yet again, management sought a long-term solution to the company’s problems. An agreement was reached with Hyundai Electronics Industries Corporation, a gigantic South Korean-based firm, to purchase a 40 percent interest in Maxtor. Under the terms of the agreement, Hyundai would put up $150 million and receive almost 20 million shares of common stock in Maxtor at a price of $7.70 per share. Furthermore, the agreement would entitle Hyundai to representation on Maxtor’s board of directors and voting rights proportional to its ownership of Maxtor stock. The deal pleased both companies: Maxtor would gain desperately needed cash, and Hyundai would benefit by Maxtor’s presence in the international disk drive market.

At the end of 1993, the agreement between Maxtor and Hyundai was still awaiting approval by Maxtor shareholders and the governments of the United States and South Korea. This delay meant that Maxtor had still not received the cash as stipulated in the agreement, although it appeared likely that the money would be forthcoming. In addition, Maxtor’s difficulty in getting its products to market in a cost-effective, timely manner still hampered the company’s ability to improve its financial condition. Maxtor’s 2.5-inch, 250-megabyte disk drive, for example, was experiencing severe production problems. According to Chief Executive Officer Laurence Hootnick, Maxtor’s future viability depended on an infusion of capital and an ability to bring products to market on time. As of mid-1994, whether or not Maxtor could get the cash it needed to stay afloat and solve its seemingly intractable production delays, according to many people within the disk drive industry, was sheer speculation.