Imation Corporation

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Imation Corporation

One Imation Place
Oakdale, Minnesota 55128-3414
U.S.A.
(612)704-4000
Fax:(800) 537-4675
Web site: http://www.imation.com

Public Company
Incorporated : 1996
Employees : 9,700
Sales : $2.3 billion (1996)
Stock Exchanges : New York
SICs : 3679 Data Storage & Imaging Systems; 3695 Magnetic & Optical Recording Media; 3695 Computer Software Tape & Disks, Blank: Rigid & Floppy; 3555 Printing Machines & Equipment; 3861 Photographic Equipment & Accessories, Camera & X-ray Film; 3844 X-ray Apparatus & Tubes: Medical, Industrial, Research, & Control

In the closing months of 1995, Minnesota’s 3M Corporation, one of the bluest of America’s blue-chip companies, announced that five of its businesses would be spun off the following year to form a new data storage and medical imaging company named Imation Corporation (from the words imaging, information, and imagination). Little mystery surrounded the reasons for the $2.3 billion divestiture: since January 1994, 3M’s data storage and imaging operations had been posting stagnant revenue growth year after year. 3M management decided a spinoff would not only remove the drag on its own balance sheet but might give its flagging businesses the capital and operational independence they needed to grow their way out of their earnings funk. Thus, as 1995 drew to a close, 12,700 of 3M’s 70,000 employees received a letter informing them of their reassignment to the new company. Those “Imation designees” who agreed to the transfer would retain their 3M salaries and be relocated to a former 3M office complex in Oakdale, a suburb of St. Paul. Those who opted out—there were more than 3,000—would be given early retirement packages and 3M’s gratitude. On July 1, 1996, Imation would officially begin business as a public corporation.

Born of 3M Innovation: 1902-81

3M’s penchant for creating (if rarely spinning off) new businesses had begun within a few years of its founding in 1902 as the Minnesota Mining & Manufacturing Company. Transparent Scotch tape, the dry-printing photocopy process, and the ubiquitous “Post-It” adhesive note pad were only the most prominent of the tens of thousands of new products it introduced over the next 90 years. Through strong management, an unusual research- and innovation-driven corporate culture, and an unbroken string of successful new product launches, 3M had grown by the mid-1990s into one of the 100 largest and most profitable companies in the United States. Its first foray into the businesses that would comprise Imation began in 1947 when its engineers unveiled the first magnetic recording tape, the forerunner of the cassette tape. With the marketing help of singer Bing Crosby, 3M’s branded “Sound Recording Tape” transformed the music industry and by the 1950s had evolved into a new product, Scotch Commercial Videotape, just in time to supply the blossoming U.S. television industry.

In the 1950s and 1960s, 3M ventured into the related fields of dry-silver microfilm and photographic products. The medical imaging products that (with photo color products) would comprise 29.5 percent of Imation’s revenues in 1996 were outgrowths of 3M’s first forays into radiology and medical X-ray technology in the 1970s. Likewise, Imation’s printing and publishing technologies (23 percent of 1996 revenues) grew out of such early printing-related 3M innovations as the Matchprint color proofing system for commercial printers, first introduced in 1972. The mainframe computer began to become an indispensable tool of U.S. industry in the 1950s and 1960s, following IBM’s introduction of the first computer memory in 1956. That year, “Big Blue” unveiled a random access disk drive (one capable of accessing data anywhere on a computer’s disk) with a capacity of 5,000 bytes (5 megabytes [MBs]). By the 1970s IBM’s head start in computer memory had spawned the “Winchester” hard drive for mainframe computers (so named because it featured two 30-MB disks, echoing the famous “30-30” Winchester rifle). When Seagate Technology adapted the Winchester standard for a smaller 5.25 hard disk drive in the late 1970s and early 1980s, the stage was set for the personal computer revolution that erupted with IBM’s introduction of the first PC in 1982.

Meanwhile, at 3M Lewis Lehr had been named CEO in 1981 and among his first acts was the reorganization of the company into 40 divisions divided into four major sectors—industrial and consumer products, life sciences, electronic and information technologies, and graphic technologies. The businesses that would become Imation were now distributed between 3M’s Graphic Technologies and Electronic and Information Technologies divisions. Lehr linked them even closer when he eventually renamed the Graphic Technologies segment “Imaging” and combined it with the Electronic and Information Technologies operation.

Enter Removable Data Storage: 1982-94

In late 1982 an upstart California company named SyQuest Technology introduced the first removable PC hard disk drive (with a storage capacity of 6.38 MBs), giving computer users the ability to handily back up their important data in removable cartridges. Mission-critical data was now safe from disastrous system crashes and could be preserved on an infinitely expandable series of cartridges—regardless of the size of users’ hard drives. The computer drive industry began a period of uninterrupted growth in which more than one hundred firms entered the fray, including Iomega, DMA, Eastman Kodak, and Data Technology Corporation, and drive capacity tended to double every year and a half. Over the next 10 years, the vast majority of these firms failed or were merged with other companies. And by 1986 the capacity of a typical removable data cartridge had grown to 15 MB and then by 1987 to 44.5 MB (when most PC hard drives themselves could still only hold 80 MBs of data). By the mid-1990s more than 150 million computers contained removable data storage (RDS) systems.

In the mid-1980s 3M had launched another of its future Imation businesses—CD-ROM manufacture—and by 1989 had appointed Imation’s future CEO, Bill Monahan, to head its data storage products division. (Within three years, Monahan was transferred to 3M Italy where the specialized photographic chemicals used in 3M’s photographic, medical imaging, and information printing products were developed and manufactured.) As 3M’s diskette manufacturing business met intensified competition from price-cutting foreign makers like Sony it moved increasingly into the data storage products business, which was enjoying enormous sales growth and would eventually comprise more than 40 percent of Inflation’s total revenues.

In the early 1990s Iomega introduced its Bernoulli brand of removable data cartridges for the IBM compatible PC market, and Iomega and SyQuest waged ferocious price wars to claim the top spot in the RDS market.

In 1992, 3M introduced “write-once” optical media for multifunction PC drives, launched a huge 2 gigabyte (GB) data storage cartridge product, and unveiled data storage products for the common QIC data storage format. By 1993 it had rolled out data cartridges capable of holding a whopping 5 GB of data and by 1994 was proposing a 25 GB standard for the next generation of QIC data storage tapes as well as marketing data storage cards. for laptop computers. By 1994 competitor SyQuest was offering data cartridges with a 110 MB to 270 MB capacity.

As new data storage media including optical (or “floptical”) and magneto-optical disks began to vie for the data storage market, in 1995 3M unveiled its new Travan data storage line in a joint venture with a group of drive manufacturers. The Travan technology used minicartridges manufactured by 3M with a storage capacity of 400 MB to 4 GB—and eventually up to 15 GBs per disk by 1997. It quickly began to emerge as a new data storage standard, and 10 leading tape drive manufacturers, including Seagate and Hewlett-Packard, adopted the Travan format.

In the mid-1990s 3M and Iomega both conducted market research that showed that the typical PC user wanted an RDS product that could store at least 100 MBs of data, cost no more than $200, and use media priced at less than $20. But Iomega beat everyone to the punch with its new 100-MB Zip drive product, a technology that had originally been developed by Fuji. Because of its ease of use, reliability, $200 price, and Iomega’s shrewd marketing campaign (“Because It’s Your Stuff”), by mid-1995 the Zip drive had became the RDS leader, selling some 2 million units in its first year alone. By 1996 Iomega had expanded its lead over 3M and other competitors with the introduction of Zip’s high-end successor, the 1 GB Jaz drive.

In its eagerness to capture the data storage market, however, Iomega marketed its drives as replacements for the standard 3.5-inch PC drive: users would have to purchase new high-capacity diskettes in order to use the drives, which were not backward-compatible with the longtime industry standard—the 1.44 MB, 3.5-inch floppy disk. For this reason, computer manufacturers did not rush to install Iomega’s drives as original PC equipment and, though hugely popular, they remained aftermarket accessories.

Company Perspectives:

Imation’s vision is to deliver unsurpassed value to our customers, shareholders, employees and communities throughout the world.

Battling for Revenue Growth: 1995-96

Despite its successful efforts to remain at the forefront of the data storage and medical imaging industries the intensity of competition was keeping 3M’s data storage and medical imaging divisions in the red. 3M’s management decided to concentrate on its industrial, consumer, and life sciences product lines. By late 1995 3M was sending letters to 12,700 of its employees offering them a place in the new Imation spinoff. Gallup pollsters canvassing the “Imation designees” on their reaction to the plan were greeted with such responses as “shocked,” “betrayed,” and “apprehensive,” and only 75 percent of 3M’s data storage and medical imaging workers eventually wound up in Imation cubicles. Two layers of management, five manufacturing plants, seven labs, and some 5,000 jobs had been jettisoned.

Why would Imation succeed where its businesses had failed under 3M? 3M’s management pointed to the new company’s streamlined operations, which would enable Imation to move more nimbly in its competitive business segments through the “natural synergy” of its product groups, and a new management compensation program that would incentivize Imation executives by linking their pay to the company’s fortunes. Finally, as an independent entity Imation would get the attention of Wall Street, enabling it to fuel its growth through public stock offerings. At its inception, Imation would be that rarity among newly minted corporations—a fully developed business enterprise with already-existing customers in 60 countries (most importantly, Italy, the United Kingdom, France, and Germany), no fewer than 10,000 products, an arsenal of 1,800 3M patents and hundreds of worldwide licensing agreements, and the right to market its products under the powerful 3M brand name for three years. 3M and Imation would not compete in each other’s businesses for five years.

On Day One—July 1, 1996—Imation opened for business as the world’s largest supplier of branded removable magnetic and optical media; the world’s leading supplier of medical imaging systems for generating diagnostic images from magnetic resonance, computer timography, nuclear medicine, ultrasound, and other electronic imaging systems; one of the world’s largest manufacturers of private-label 35-mm color film for the amateur photo market; and one of the world’s largest suppliers of color proofing systems for the graphics arts industry. Its Matchprint and Rainbow printing industry products were industry standards, and it boasted an installed base of more than 7,000 thousand laser imagers for medical imaging applications. An enviable 50 percent of its sales went overseas, and its product lines covered four major markets: information processing, management, and storage (including computer diskettes, data cartridges and Travan cartridges, computer tapes, rewritable optical media, and CD-ROM replication services— 41 percent of its 1996 revenues); information printing (including conventional color proofing, digital color proofing, printing plates, image setting and graphic arts products, and carbonless paper products); medical and photo imaging (laser imaging products, laser imagers, X-ray film, “dry” imaging products, film processors, and photographic film products); and information processing services (including technical field service support for equipment, customer service, documentation and training for equipment, engineering and office document systems).

Imation’s presence in the competitive data storage industry had been given a major boost months before the spinoff took place. The Achilles’ heel of Iomega’s wildly successful Zip and Jaz backup storage drives was their lack of backward compatibility: they were designed to replace the 1.44-MB diskette drive whose diskettes would simply not work in Iomega drives. Spotting a potential market opening, in May 1995 Japan’s Matsushuta-Kotobuki Electronics and Compaq Computer developed a 3.5-inch floppy disk drive for use with a diskette with 120 MBs of capacity the would one-up Iomega by offering backward-compatibility: users could use both standard 1.44-MB and the new 120-MB disks in the Imation drive.

In March 1996 3M announced it would manufacture the diskettes for the new cross-format LS-120 drives in conjunction with OR Technologies. With one of the world’s biggest PC makers already installing LS-120 drives on some of its new DeskPro computers, 3M/Imation seemed poised to steal some of Iomega’s thunder. Moreover, a month before the spinoff, 3M announced the fifth generation of its Travan technology and the introduction of Tape-IT, a software program developed in conjunction with PGSoft Inc. that enabled users to use 3M’s data cartridges in several new ways, including for large file transport and for the direct recording and playback of computer data, audio, video, and multimedia files. Joining them would be a new line of digital Rainbow color proofing systems, a new family of Dry View imagers, and new medical imaging delivery systems developed with Cemax/Icon and Hewlett-Packard.

Wall Street greeted Imation’s stock with less than unbridled enthusiasm. From an initial price of $33 a share it had fallen to $20 by the end of July 1996, and after regaining the $33 mark in December it began a slow but steady decline to under $24 by July 1997. Analysts and investors alike were clearly waiting to see signs that the businesses that had been unprofitable for so long with 3M had discovered the secret of success. Imation’s management set a goal of achieving 15 percent annual growth in earnings per share by 1998 and in 1996-97 confidently added offices in the Philippines, Singapore, and Russia to its existing presence in such emerging markets as China, India, Indonesia, and Brazil. In July 1996 it sold off its Italian offset plate plant, reached an agreement with Israel’s Scitex Corp. to create a new large-format digital proofing system, and in February 1997 won an agreement with Germany’s Siemens Nixdorf Informations-systeme AG to integrate Inflation’s LS-120 drive technology into some of its European computers. In April, Imation convinced Samsung Electronics of Korea Co. to preinstall LS-120 drives in two of its multimedia PCs, and in August 1997 Imation and Norway’s Tandberg Data ASA agreed to jointly design and manufacture new data cartridge technologies for the growing network server segment of the data storage market.

Although Imation managed in its first three months to break the 11-quarter string of stagnant revenue growth that stretched back to its 3M years, in its second quarter it posted a $37.8 million loss. While its hoped-for penetration of the RDS market continued to rest on the uncertain fortunes of the LS-120 diskette, Imation turned to acquisitions, partnerships, and new product launches to solidify its business. In August 1996 it bought Seattle-based Luminous Corporation, a developer of digital desktop publishing software, to strengthen its line of prepress printing products for the growing digital segment of the printing industry. In May 1997 it announced the acquisition of Cemax-Icon Inc., a developer of software and systems integrator for the medical imaging and information management industry, and in June it acquired Minnesota web developer Imaginet, which resulted in the creation of Imation Internet Services, Imation’s bid to gain a foothold in the exploding Internet/intranet market. It partnered with Presstek in April 1997 to develop new digital halftone imaging solutions and with TeraStor Corporation to manufacture the latter’s 20-GB “near field” data storage system. It also closed cooperative agreements with ECRM Corporation of Massachusetts to develop dry film imaging technology for the graphic arts industry and with ATL Ultrasound Inc. to provide its Dry View Laser Imagers for use in ATL’s mobile ultrasound demonstration vans.

It also stayed true to its 3M roots by unveiling a slew of new products and services, including winning its first non-3M patent in October 1996 (for a Travan RDS minicartridge design). In1996 alone, Imation introduced a digital proofing system for the printing industry under its Matchprint brand, won a multimillion-dollar contract from the defense department for its medical imaging equipment and X-ray film, and launched a large-format color proofing system that promised to eliminate two hours from the prepress process used in the printing of posters and other oversize printed materials. In the fall of 1996 it announced a further advance in its continuing contributions to the digital revolution underway in the printing industry by announcing that its Rainbow digital color proofing system had been integrated within an automated prepress workflow environment created by Luminous. In a flurry of year-end product launches, it also introduced a Windows-compatible version of its printing workflow productivity software, Rainbow, which had previously been available only in a Macintosh version; installed its 1,000th Dry View Laser Imager (only nine months after the product’s introduction); unveiled an improved version of its single-use disposable camera; introduced its Image Acquisition Manager Plus system for transmitting medical images across computer networks; and began shipping a compact film handling and processing system.

In 1997 Imation continued to act like a miniature version of 3M by unleashing a new torrent of products and features. In March, technology giant Hewlett-Packard announced that Imation’s Dry View Laser Imager was its choice for hospital demonstrations of its new ultrasound system. In April, Imation unveiled a software product for monitoring and improving the productivity and security of backup tape libraries in client/server environments, which it developed in a joint arrangement with Sterling Software of California. Later that month it announced the expansion of its Rainbow color proofing software to work with Adobe’s widely used PostScript language and through Luminous it unveiled a new software program that would allow printers to send proofs of their printing work to clients via a remote phone line connection for their approval. It also introduced new features for its Matchprint Laser Proof product line that would enable it to move closer to its goal of providing a “total customer solution” for the new age of digital printing technology. Its new Printers-Web software, for example, would enable printing firms to create an entire web site out of the box, which would allow them to offer clients job tracking, estimating, quotes, customer service, and even over-the-Internet transmission of completed printing jobs via the World Wide Web.

Though admitting that its earnings for the second quarter of1997 would fall under analyst’s estimates, Imation kept its new product juggernaut rolling with the introduction of a new family of RDS cartridges geared specifically to the business client/ server and workstation environments, a tape library system that automates tape backup and data archiving for business computer networks, and a new generation of X-ray process films that use 50 percent less developer chemicals than existing products but with no loss of image quality.

Imation was meanwhile holding its own in its most visible and important product line: removable data storage for the business and consumer PC market. Although more and more vendors and computer manufacturers—including Hitachi-Maxell, Fujitsu, and Exabyte—were offering Imation’s LS-120 backward-compatible disk drives, the pace of growth was slower than expected despite the fact that Iomega had partially fumbled its early market lead by being forced to recall thousands of its Jaz drives for defects. To jump start LS-120 sales, in June Imation renamed the product SuperDisk, wrapped it in a new snazzy package, and introduced a new external SuperDisk drive that would enable users to switch it from computer to computer. Major obstacles remained in Imation’s path, however. It seemed unable to win Wall Street’s confidence, and though Iomega had signally failed to make good on its claim that its Zip and Jaz drives would replace the tired-but-true 1.44-MB diskette, so too had the LS-120/SuperDisk. By the spring of 1997 only 15 percent of Compaq’s computers came with the LS-120/SuperDisk preinstalled instead of the standard 1.44-MB 3.5-inch disk drive.

Principal Subsidiaries

Luminous Technology Inc.; Imation Australia New Zealand Pty. Ltd.; Imation Corp. Japan; Imation Hong Kong Ltd.; Imation Korea; Imation New Zealand; Imation Singapore Pte.