Storage Technology Corporation

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Storage Technology Corporation

2270 South 88th Street
Louisville, Colorado 80028-0001
U.S.A.
(303) 673-5151
Fax: (303) 673-5019

Public Company
Incorporated: 1969
Employees: 10,000
Sales: $1.58 billion
Stock Exchanges: New York

Storage Technology Corporation (StorageTek) is a world leader in the design and manufacture of information storage and retrieval devices for mainframe and mid-range computer systems. Ranking 239th on the 1991 Fortune 500 list of American manufacturers only seven years after filing for Chapter 11 bankruptcy, StorageTek is one of the computer industry’s most successful turnaround stories. The company’s products include solid-state disks, rotating magnetic disks, reel and cartridge tape drives, automated library systems, and a variety of support software.

In 1969 Jesse Aweida, a Palestinian refugee and former executive of IBM, founded StorageTek, a company that dared to compete with computer industry giant IBM. Aweida surmised that a tape drive for an IBM mainframe computer could succeed against IBM’s own product, provided it was 15 percent cheaper. StorageTek introduced its first product, the 2450/2470 tape drive, in May 1970 and proved Aweida’s conjecture correct. During the next few years StorageTek designed and manufactured Super Disk, 8000 Series Disk Subsystem, and pioneered a solid-state disk, the 4305. The success of these products made the company a leading manufacturer of IBM-compatible, highspeed tape subsystems.

StorageTek went public with a common stock offering in 1971, and in 1975 its stock was listed on the New York Stock Exchange. The company’s growth, which began in the mid-1970s, accelerated in the late 1970s and early 1980s, rising to an annual rate of 38 percent. By 1981 it had garnered $82 million on sales that approached $1 billion, and stock, which sold for $2.50 per share in 1977, rose to $40. Aweida also kept the company focused on the development of new products: in 1982 StorageTek introduced its 8890 Sybercache disk control unit and in 1983 announced a 9-track subsystem.

Unfortunately, Aweida’s desire to develop products to compete with IBM eventually overextended StorageTek’s resources. The company’s efforts to design a mainframe computer and new optical disk technology consumed $250 million in research and development (R&D) and valuable time and energy. A new generation of disk drives, which StorageTek needed to maintain its market share against IBM, suffered from the expanded focus of the R&D department; the new generation was released in early 1984, more than a year behind schedule. With a $40 million loss in 1983 and a more than $500 million dollar loss in 1984, the company was forced into bankruptcy.

On October 31, 1984, StorageTek filed for Chapter 11. In November a group of financial institutions, which included Chemical Bank, backed out of a proposal for a $150 million line of credit for StorageTek. With a total cessation of operations imminent, the company convinced its bankruptcy judge to give it a primary claim on the receivables of a leasing subsidiary. The $140 million StorageTek gained from this ruling was to sustain operations for a year.

Aweida left StorageTek at the end of 1984. According to Debbie Silversmith, the director of research at the brokerage firm Hanifen Imhoff in Denver, Aweida “was much better at being a creator and an idea man” than a manager.

In January 1985 StorageTek’s board of directors replaced Aweida with Ryal R. Poppa, an aggressive executive who was known for his ability to rejuvenate floundering companies. He had recently proven his talents at BMC Industries Inc., where in just under three years he transformed the eyeglass and stamped metal parts manufacturer from a company with sales of $88 million to a high-tech firm with sales of $330 million. StorageTek hoped Poppa would be able to satisfy creditors long enough to get the company back on its feet.

Poppa immediately abandoned the development of a mainframe computer and, after some thought, optical disk technology as well. He also offered for sale StorageTek’s microtechnology research division and the company’s interest in Global-Ultimacc Systems Inc., which designs and produces computer systems for small businesses. He consolidated facilities—including closing the company’s plant in Ireland—reduced the staff from 15,000 to 8,500, and put the sales force on commission to collect outstanding debts, a maneuver that generated $70 million from accounts receivable.

Other priority tasks for Poppa were satisfying creditors, some of whom were trying to break up the company, and staving off takeover attempts. StorageTek owed approximately $700 million to its creditors, and although the recent influx of cash helped, Poppa needed to convince regular customers to stick with the company and place new orders. Poppa told Forbes reporter Barry Stavro, “We had only three months. If we hadn’t gotten our customers back, we would have been into [liquidation]. The first question [from customers] always was, ‘Are you going to make it?’ ”

Poppa felt that StorageTek’s best chances for survival lay in returning to its traditional strengths: the design and manufacture of tape and disk storage systems. The company managed to come out with its new disk drive in April and by the end of 1985 had cut its losses to only $52 million. Competition, however, remained fierce. IBM controlled approximately 85 percent of the disk drive market, and Fujitsu and Hitachi of Japan had gained ground while StorageTek struggled with bankruptcy proceedings.

Although Poppa had halted the company’s expensive research into such high-tech areas as optical disk technology and mainframe computers, he decided to risk development of a new product in StorageTek’s area of expertise: an automated tape library. Rather than store data on expensive on-line devices, many companies store information on tape cartridges that are shelved and then retrieved by data center clerks when they are needed by the computer. Although this system is cheaper, it is time consuming. Automated systems had been attempted with a robot traveling down a long, narrow library aisle to retrieve the tapes, but the reliability of the robot, which had to drag its power and signal cabling after it, was low. In addition, when the mechanics failed, the library was relatively inaccessible to humans who wished to get the data to their computer. When Poppa took over StorageTek, the company’s engineers had been working on a new system in which the robot would sit in the center of a silo, encircled by the tapes. This arrangement pared the robot’s movements down to simply rotating in place and grabbing the tape cartridge.

Under Aweida’s management, the development of this device had been a low priority. Engineers, in fact, had hidden their plywood robot model from Aweida, who wanted them to work on more high-tech projects. Poppa’s decision to invest StorageTek’s few resources in new robot technology was based on engineers’ crude wooden mock-up robot and his knowledge that IBM had declined developing an automated tape retrieval system. He had heard an IBM vice president speak on the subject at an industry conference. The executive felt that the market for such a product was negligible, since 90 percent of the 300 million computer tapes in the world did not need to be accessed at the speed of a robot. “That meant there were thirty million tapes that did need robotic access,” Poppa explained in Financial World, justifying his decision to go ahead with the development of an automated library.

While StorageTek began expending its energies on the automated library in the mid-1980s, the company’s finances continued to improve. On revenues of $696 million, the company reported net income of $36 million. Because of rumors of takeovers, stock prices fluctuated considerably in 1986, rising at one point from $4 to $7 per share.

Poppa invested ten percent of the company’s revenues into research and used customers as an additional resource in the creation of new products. In particular, he involved customers in every stage of the development of the automated tape library. He told Financial World, “We changed the design hundreds of times because of customer requests. This was very different from the way StorageTek used to do business.” StorageTek announced the completion of its Automated Cartridge System (ACS) in January 1987.

Seven months later the company emerged from bankruptcy, holding an agreement with creditors that paid 100 cents on the dollar. The plan included distributions of $187 million in cash, $285 million in long-term notes, and approximately 193 million shares of common stock. These new shares represented about 80 percent of the total, diluting the old shareholders’ stock by almost five to one. Poppa reasoned that shareholders would regain their losses quickly once StorageTek settled the Chapter 11 proceedings, and in fact, within five years the stock had risen from the low single digits to $66. Profits increased steadily; the company’s net income in 1988 was $47 million and rose to $92.4 million in 1990.

During the late 1980s and early 1990s, StorageTek’s automated tape library became its flagship product, with 3,700 sold within four years. Customers included Chrysler Corporation, Boeing Aerospace & Engineering, the Canadian government, and the United States Postal Service, organizations that use the system to store such information as addresses and census and tax records. When the product was introduced, it was compatible with only IBM computers. Adaptions were made through the use of servers, software programs, and cooperative agreements so that the library not only could be used with the major processors worldwide, but could also share data between processors from different vendors.

In 1992 StorageTek introduced a whole family of automated tape libraries. The original, named 4400 ACS, can house 6,000 cartridges and up to 16 libraries can be connected for storage of 96,000 cartridges, or 19 million megabytes of data. The subsequent PowderHorn Library is essentially an improved version of the 4400 ACS, holding the same number of cartridges but featuring an accelerated cartridge exchange time. A new arm design for the robot allows it to exchange—mount and dismount—350 cartridges per hour. A “driveless” library (one with no transports attached) and two smaller-capacity, less expensive libraries were also introduced: the ExtendedStore Library, designed for companies with archive storage requirements; the TimberWolf, which holds only 500 cartridges; and the Wolf-Creek, which holds 1,000 cartridges.

Also in 1992 StorageTek announced Iceberg, its new disk-array storage subsystem. The disk drive uses a fault-tolerant technology called RAID (Redundant Arrays of Inexpensive Disks) that was pioneered by StorageTek. Unlike IBM’s most advanced model, which stores information on one large disk, Iceberg links together a series of cheap disks, similar to those used in personal computers. By spreading data out on several disks, Iceberg better protects the information it stores from loss and corruption. In addition, as Poppa explained in a company publication, “When a disk in an Iceberg subsystem fails, the subsystem will heal itself while continuing to work at near-peak efficiency. This means that disk failures will no longer be crippling events for business.”

Poppa outlined further benefits that derive from the RAID technology: “Because many subsystem activities take place simultaneously, we have eliminated many bottlenecks that slow down traditional disk storage. And because a great deal of intelligence had been designed into the storage controller, Iceberg can be adapted for use with virtually all mainframe and network-attached computers.”

The $145 million StorageTek invested in Iceberg should more than pay off. IBM was at least a year and a half behind StorageTek in developing an equally sophisticated faulttolerant disk drive, according to Roxanne Googin of Gruntal & Co., who was interviewed in Financial World. In 1992 IBM had a 70 percent market share in disk drives. If StorageTek can capture only 10 percent of that with its Iceberg system, Googin estimated, the company would see $1 billion in revenue. She predicted, “This product will be damaging to IBM. It completely changes the game.”

By 1992 StorageTek had come a long way from filing for bankruptcy. The company had proven its staying power by overcoming its financial hurdles and seemed to be giving IBM a run for its money. With its popular 4400 ACS and its new family of libraries, the company appeared prepared to maintain its leadership in the automated tape library market. It could even gain on IBM in the disk drive market with the advanced, fault-tolerant technology it developed for Iceberg. The rise in StorageTek’s stock—which reached $66.50 per share in mid 1992—seemed to indicate a growing confidence in the company. Despite its past difficulties, StorageTek had regained its footing and become a formidable competitor in the information storage industry.

Principal Subsidiaries

StorageTek International Corp.; StorageTek Computer Finance Corp.; Storage Technology de Puerto Rico, Inc.; United Data Corp.; StorageTek Media Corp.; StorageTek Computer Research Corp.; Storage Technology Optical Disk Development Corp.; Relocation Operations, Inc.; StorageTek Integrated Systems, Inc.; Storage Technology of Australia Pty. Limited; Storage Technology International S.A. (Belgium); Storage Technology GmbH (Germany); Storage Technology Italia; Nippon StorageTek Kabushiki Kaisha STC Japan Ltd.; Storage Technology B.V. (the Netherlands); Storage Technology Limited (United Kingdom); Documation S.A.R.L. (France); Documation Limited (United Kingdom); StorageTek Canada, Inc.