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Flood of Changes Drowned Memorex Telex

Flood of Changes Drowned Memorex Telex

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It is a company that started off on the wrong foot, stumbled for nearly a decade and on Oct. 15 fell flat on its face.

In a Delaware bankruptcy court a once-shining Tulsa star was extinguished, smothered by eight years of mounting debt.

About 50 Tulsa employees, and an additional 100 nationally, were laid off Nov. 1 without severance pay or benefits. Earned vacation pay is gone. Employee expense checks have bounced. The company has to borrow money from its buyers and past creditors to make payroll.

More job losses are expected, but no one will know how many until after the company's assets are carved up by at least three acquisitions.

Memorex Telex is broke.

The U.S. subsidiaries of Netherlands- based Memorex Telex N.V. listed assets of $111.7 million; its liabilities: $255.8 million.

The company owes the Internal Revenue Service $31.1 million in past taxes, interest and penalty charges.

Past managers may have made some mistakes, but there never was any evidence of misuse of funds, said the company's former director of tax compliance.

Instead, observers say, Memorex Telex was a victim of its times.

When Tulsa-based Telex Corp. merged with Memorex International N.V., terms like hostile takeovers, white knights, poison pills, leveraged buyouts and junk bonds were just entering the American vernacular. They also made their way into headlines describing this union of two worldwide computer companies.

The deal was done on borrowed money -- a debt that dogged the company as it fought to survive in a rapidly changing industry. The Early Days

Memorex Telex's U.S. operations traces its roots to 1936, when Allen Hempel invented the first portable hearing aide. Minneapolis, Minn.-based Telex Products Co. was incorporated in 1940. In 1959, the company went pub lic, and began to diversify into the communications and data processing markets.

Three years later, a Tulsa manufacturer of missile guidance components and aircraft tape recorders, Midwestern Instruments Inc., caught Telex's eye. The companies merged in 1962 with Tulsa becoming the combined company's headquarters.

The Telex Corp. entered the computer industry in its infancy. The company's boom began in the early '70s when it invented the first IBM clones -- copycat digital tape drives that plugged right into the market leader's mainframes.

The less-expensive tape drives drew the ire of Big Blue and the two companies exchanged lawsuits -- Telex alleging restraint of trade; IBM saying Telex was stealing its technology. The legal battle went all the way to the Supreme Court while the Justice Department launched its own antitrust suit against IBM. Both companies eventually decided to settle out of court and although no money changed hands, Telex documents marked the event as a "moral victory."

The company continued to grow through the 1970s and '80s, relying heavily on its IBM-compatible components.

Under the leadership of chairman Roger Wheeler, Telex grew to be a leading IBM competitor. Then, tragedy struck.

On May 27, 1981, Wheeler was gunned down in his car as he left Southern Hills Country Club. The murder remains unsolved, but police suspect the killing was a mafia hit tied to Wheeler's ownership of Jai Alai playing arenas in Florida and Connecticut.

After Wheeler's death, Telex president Stephen Jatras assumed the role of chairman and chief executive and the company continued its march toward success.

Rapid Growth

In 1987, Forbes magazine ranked Telex 55th in its list of 1,000 fastest- growing companies. In terms of total return to investors, it was fifth in the Fortune 500.

"By 1987, which is just before the acquisition by Memorex, the company grew to $840 million in annual revenues and an employment level of 7,500 people, mostly in the United States," said David Gannon, who was the company's director of tax compliance and assistant treasurer until the Nov. 1 round of layoffs.

Gannon started with the company in 1977. Although he was not directly involved in the company's financial decisions, he was very familiar with them. He has done the company's taxes for more than a decade.

The beginning of the end began on Oct. 8, 1987, when New York financier Asher B. Edelman initiated a hostile takeover of the company.

In an attempt to grab 10.5 million of the company's 14.7 million outstanding shares, Edelman offered Telex shareholders $65 for their $50-per-share stock. The tender offer was valued at more than $950 million.

Objecting to Edelman's offer, Telex's board of directors adopted a number of anti-takeover maneuvers including a poison pill position that would have heavily increased Edelman's costs. The financier tried to fight the move in court and a spate of legal filings followed.

After nearly 10 weeks of wrangling, a European white knight appeared.

The Wall Street crash of Oct. 19 dropped Telex's stock price and subsequently reduced Edelman's offer to $55 per share.

On Dec. 7, 1987, privately held Memorex offered $62 -- $6 in stock and $56 in cash.

A merger with Memorex was endorsed by Telex's board, which included company president George Bragg, who had previously worked for the Dutch company. A week later, the merger agreement was announced.

Memorex spent $911.4 million on its tender offer. Telex paid Edelman nearly $9.5 million to end his lawsuits and go home. Telex stock closed that day at $56, up $3.25.

Ironically, the white knight rescue would be the company's undoing.

"I think when Memorex came in, their management was somewhat intimidated by the fact that Telex was so centrally controlled, that that much power -- half of the combined operations -- was in the United States," Gannon said.

"I think they were unwilling to leave that much power in the hands of the old Telex managers. So they dumped basically all of the old Telex officers and directors. Probably only a few survived more than a few years."

A decentralization of management and operations made the company less and less efficient in an increasingly dynamic market. And, to make matters worse, the company was deeply in debt almost overnight.

Over Its Head

The acquiring Memorex International N.V. was formed in 1986 after its management carried off a $623 million leveraged buyout from parent company Unisys Corp.

The company had to borrow an additional $950 million, $200 million through the sale of high-yield junk bonds, to finance the Telex merger.

When the merger closed in June, Memorex Telex had combined gross revenues of nearly $2 billion, Gannon said. Its debt was nearly $1.65 billion with monthly interest charges of $15 million, reports indicate.

"That was nothing really unique," said Tulsa money manager Frederic Russell. "That was the modus operandi of the '80s, when debt was considered to be nothing but an abstraction.

"Companies were enamored with high- yield debt financing, even companies who were highly unpredictable, if not downright discouraging," Russell said.

"But, the amount of debt that Telex had -- because their markets softened -- became very much a real consideration. It crossed the border from abstraction to visceral reality."

The late '80s and early '90s brought major hardware and software changes to the computer industry. Microprocessors, desk- top computers and network programs were replacing centralized mainframes.

Memorex Telex couldn't keep up and its IBM-compatible products lashed it to another slow-to-evolve and sinking company.

As IBM fell, Memorex Telex fell with it. But, virtually everyone in the high-tech market was hurt by the volatile changes in technology, Gannon said.

"I don't think anyone involved anticipated the downturn would be as significant as it was. But, we are in good company. Many of the other companies in the computer industry . . . were affected by the same things that affected us. The only reason they did not all go under is because they started in much better condition than we were," he said.

From its 1989 peak -- with gross revenues of $2.65 billion and 10,000 employees worldwide -- Memorex Telex tumbled.

"We started that downspin in the market with a huge debt. As it became more competitive, profit margins decreased and the company was unable to service its debt," Gannon said.

Cutting Jobs

By 1992, revenues had fallen to $1.5 billion, with 7,200 employees. Layoffs were becoming a regular event. But despite the cuts, Memorex Telex couldn't keep up with its smothering debt service.

In 1991, after pleading with employees to help support the company's burden by buying its bonds, Memorex Telex announced a major reorganization.

Approximately 800 jobs would be lost nationally, nearly 550 in Tulsa. The headquarters was moved to Irving, Texas, further decentralizing the company. Two of Memorex Telex's four Tulsa locations were put up for sale. And, in an effort to trim its debt, Memorex Telex offered bondholders $540 million in company stock in exchange for their coupons.

Five months later, the company would file its first pre-approved Chapter 11 bankruptcy, shedding itself of $600 million in debt, Gannon said.

But, it wasn't enough. Revenues and employment continued their downward spirals -- $1.3 billion in 1993, $1 billion in '94. Another 1,000 employees would be cut between the reorganization and early 1994.

Still plagued by cash-flow problems, Memorex Telex returned to bankruptcy court on Feb. 11, 1994, stripping itself of an additional $700 million of its millstone- sized debt, Gannon said.

"There was hope with each bankruptcy that this time we would shear enough debt so the company would survive," Gannon said. "I suppose you would have to say there was always hope."

"It was not enough," Russell said. "Man agement should be applauded for its control of expenses and employees should be applauded for their courage. But, they had a stagnant shrinking market share that no amount of expense control could surmount. . . . And, the debt burden was real."

Revenues continued to fall and employment followed. By the time the company announced its third bankruptcy and intent to sell its U.S. operations on Oct. 15, revenues were $800 million -- down nearly 70 percent from 1989.

Employment stood at 4,100, a 59 percent decline from the company's high. Today its stock is trading near 25 cents a share, virtually worthless, Russell said.

Nothing Could Be Done

Gannon said employees shouldn't blame the company's current management, the die was cast in 1987 and management has changed basically with each preceding bankruptcy.

"I don't think anyone could have saved the situation in the last couple of years," he said.

Even if business had turned around, it would have taken years to shed the debt the company had been accumulating.

Gannon said Memorex Telex had been seeking a strategic partner or buyer for at least a year "but buyers were totally intimidated by our debt load. The company had to file bankruptcy so any buyers could deal with the court rather than with our creditors."

The situation had gotten so bad, he said, suppliers would only ship cash-on-delivery. A number stopped doing business with the company altogether because they were owed so much. Shipments were slowed by vendors demanding cash up front, cash the company didn't have.

Gannon noted there has been some criticism that the move to bankruptcy was rather quick, but he said the timing was for the best. "If we had waited another two weeks, there literally would have been nothing left," Gannon said.

As it is, its unlikely there will be much left to settle what's owed.

Gannon said the company got approximately $40 million from the sale of its operations. Most of that will likely be used to pay off the debtor-in-possession financing the company has been using to keep its doors open while the Chapter 11- protected sales are completed.

Once Memorex Telex's service, storage sales and networking sales businesses are sold, the company probably will liquidate what holdings it has left, Gannon said.

"And I doubt seriously there's going to be enough money left over to satisfy unsecured creditors," he said, namely employees who may have claims against the company.

"I don't think anybody was surprised" by the company's Oct. 15 bankruptcy, Gannon said. "I think the only surprise was that it was so bad, that the company couldn't pay employees severance, accrued vacation or benefits. There is no doubt the company probably owes them that, but it's flat broke."

Editors Note: Current Memorex Telex management was asked for input to this story, but declined to respond to repeated inquiries.


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