Thanks for the note:
Bullish info on SEG from Forbes...
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Seagate's Al Shugart has used up a
fair number of his nine lives. Maybe
that's why he's more willing to share
power now.
The Seagate saga
By Mary Beth Grover
WALL STREET does not much care for
Alan Shugart, the chairman of
Seagate Technology. Just one
brokerage house rates this
manufacturer of disk drives a buy.
Analysts can find plenty to dislike in
Seagate's financials: The company
lost $423 million over the last two
quarters. Its stock is down 42% over
the past year. And look at Seagate's
president and chief operating officer.
He's Stephen Luczo, a 41-year-old
ex-investment banker with no
experience in manufacturing
operations.
Shugart, 67, shrugs at the criticism:
"It was tougher in the mid- 1980s
when we were out of cash." IBM, his
largest customer, started making its
own disk drives. "I went to New
York," he laughs, "going to all the
banks trying to get a loan. They kept
sending us to their workout
departments-you know, to the guys
who deal with bad loans."
Seagate survived that one, and
Shugart has risen and fallen many
times in his 47 years in the computer
business. He recovered sufficiently
from the IBM loss to make his Scotts
Valley, Calif.-based firm the largest
in its industry, with revenues of $9
billion in fiscal 1997. Along the way,
he survived boardroom fights, nasty
venture capitalists and three
stockholder lawsuits from William
Lerach (in two of which Lerach
extracted money).
A native of California, Shugart, in
1969, left a cushy job directing
systems development engineering at
IBM's headquarters in Harrison, N.Y.
When you visit him in his Seagate
office and see his Hawaiian shirt and
cobalt-blue pants, you wonder how
he lasted as long as he did in the
starchy IBM of those days.
Shugart moved back to the West
Coast and eventually founded a disk
drive company (Shugart Associates,
later sold to Xerox), only to be
kicked out by his venture capitalists.
Fed up with high-tech, he ran a bar
and a fishing boat until he started
Seagate with just $10,000. When he
launched the company, he was 50
years old, ancient by Silicon Valley
standards.
At 60, he was in a donnybrook with
his former employer. IBM sued him
for hiring away the engineer who was
heading up its development of
magneto-resistive heads, which
allow denser data storage. Shugart's
response was to call IBM executives
"dirty rotten bastards." The 1994
settlement of the case included a
cross-licensing agreement.
Shugart has mellowed a bit. He has
been more willing to share power.
He has given a lot of authority to his
new number two, a dealmaker
imported from Bear, Stearns & Co.
Luczo has spent the past four years
pushing Seagate into software.
Through acquisitions, Luczo has
assembled a $250 million subsidiary
that specializes in programs to
control data storage. "The naysayers
said we'd never buy anything, and
then we started buying stuff," says
Luczo. "Then they said, 'Well, you'll
never be able to integrate them and
pull together the technology.' We
have, and we'll have even more by
this time next year."
Software certainly looks like a
greener pasture than hard drives. Not
only is making disk drives highly
cyclical, but every six months there's
a new drive out that costs 20% less
than the old one yet has 30% more
storage. The gross margin is just 15%
to 20%-and that's in a good year-
while in software it can be 90%.
Successful software could also give a
big boost to Seagate's lagging stock.
Its market capitalization is just
two-thirds of sales; successful
software outfits trade at five times
sales.
Corporate data processing
departments spend a lot of their time
backing up data and creating reports.
Seagate has backup software that
automates these two unglamorous
tasks.
You tell a computer to, say, back up
this server every hour, but that server
every day. Seagate has a bit less of
this market than Computer
Associates' Cheyenne but sees an
opportunity to close the gap.
Seagate's back-up software is
bundled on Microsoft's increasingly
popular NT platform. NT is growing
50% a year, versus 2% for Novell's
NetWare, in which competitor
Cheyenne has the edge, says
market-watcher IDC in Framingham,
Mass.
Seagate is number one in
report-writing software. The selling
pitch: It's so easy to use that ordinary
folk can bypass the data processing
department and get their own custom
reports on sales or accounts payable
or whatever. At Bankers Trust, the
portfolio management department
alone generates 70,000 reports a
month. Bankers signed up with
Seagate's Crystal Info software last
December. Seagate hauls in roughly
$400,000 to $2 million of revenue
per Crystal Info client.
Luczo's goal is for sales of the
software division to be $1 billion
within the next few years. In the
meantime, he reckons, a public
offering of a minority stake would
make the division more visible on
Wall Street.
Now comes the tough part. In
October Luczo took day-to-day
control of the disk drive division.
Here, Luczo has his work cut out for
him: Last year Seagate's share in the
lucrative server market dropped from
63% to 39%. This business accounts
for 50% of revenue and, estimates
BancAmerica Robertson Stephens
analyst Patrick Tenney, 70% of gross
profit.
Luczo expects Seagate to be in the
black by the end of the year. He cut
10,000 jobs and consolidated the
company's design centers from five to
three. ?He even dared to challenge
Shugart's bold move of eight years
ago to integrate backward. Shugart
thought that making drive heads and
other components in-house was the
best way to cut costs. Luczo thought
that policy was out of date: These
days it is often cheaper to pit one
vendor against another than it is to try
to make things yourself. Furthermore,
outsourcing makes it easier to take
advantage of new technologies and
products developed elsewhere in this
fast-changing business.
Now if Luczo can only stay on
Shugart's good side.
Shugart's falling out with his number
two men is legendary. Finis Conner,
who founded the company with
Shugart in 1974, left in 1984 after
quarreling with Shugart about when
to introduce a new drive. David
(Tom) Mitchell, another cofounder,
left in 1991 after Seagate hit a bad
patch. On his way out, Mitchell tried
to convince the board it was
Shugart's fault, but failed.
Mitchell later joined forces with
Conner, who had gone on to found
Conner Peripherals. Shugart had the
last laugh. He bought Conner in 1996.
Conner and Shugart are neighbors in
ritzy Pebble Beach, but they aren't
friends.
The indications are that Shugart is
now more willing to share power. He
and Luczo play air hockey on a table
in Luczo's office one door down the
hall.
"Al and I get along," says Luczo,
"because I never bullshit him. I felt
some of his [former] management
teams hadn't been totally straight
because they were always afraid of
what happens if they tell the chief
executive he's wrong."
Will Shugart take it if Luczo argues
with him? There are no guarantees
when strong personalities interact,
but there's a lot riding on whether this
partnership can work.
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SEG is looking better and better...
Take care
Jean |
