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AL SHUGART IS IN THE DISK DRIVER'S SEAT

Buying Conner puts Seagate's squarely on top

Talk to Silicon Valley executives, and they'll tell you Seagate Technology CEO Alan F. Shugart is one of a kind--certainly the only one among them running his pet for Congress. ``The nation is going to the dogs,'' Shugart declares, ``and I don't know what else to do about it.''

He's trying to get Ernest, his Bernese mountain dog, on the ballot to give disgruntled voters a way to vent their feelings. There are Ernest buttons, a campaign committee (FOE, for Friends of Ernest) that has raised $3,000, and press releases--the latest bemoaning the ``dogfighting'' among Republican candidates. Shugart even hits up suppliers. ``I talk to him every few weeks about that damn dog,'' laughs Adaptec Chairman John G. Adler, who coughed up $500.

Welcome to the offbeat world of Al Shugart, the computer industry's disk-drive king. At 65, he's at his zenith. On Feb. 2, he acquired rival Conner Peripherals Inc., making Seagate by far the No.1 disk-drive maker, with 33% of the $25 billion industry, up from 19%. The deal gives Seagate, already dominant in workstation and mainframe drives, the top spot in the mammoth PC market, from which it retreated five years ago. ``Now Al's as big in disk drives as Bill Gates is in software,'' says Albert S. Hoagland of the Institute for Information Storage Technology at Santa Clara University. ``He casts a tremendously wide shadow.''

Wide and growing. The merger gives a huge boost to Shugart's plan to transform Seagate, already blessed with more profits and cash than all its key rivals combined, into a diversified ``data technology company.'' Conner's Arcada software unit should boost Seagate's software sales to nearly $200 million this year, and its $235 million tape-drive unit makes Seagate even more of a one-stop shop for big customers. Coupling Conner's parts-making operation with Seagate's growing capacity--it's spending $950 million on expansion this year, up from $364 million in 1995--means the company will be less dependent on suppliers for scarce components: It will be a supplier itself. Says Larry R. Hootnick, former CEO of drive maker Maxtor Corp., now with Mac cloner Power Computing Corp.: ``Nobody has Seagate's muscle.''

It's the capstone of a remarkable career. Shugart joined IBM in 1951, the day after he finished college. Ten years later he was the star of a nascent industry, leading development of the precursor to today's hard drives. But in 1969, weary of Big Blue's bureaucracy, he left for Memorex Corp., taking along some 200 engineers. Recalls James N. Porter, a market analyst with Disk/Trend Inc. who worked at Memorex then: ``All he had to do was raise the flag to get people to work with him.'' When Memorex hit the skids a few years later, several loyal followers joined in launching Shugart Associates, which would pioneer the floppy disk. Among them: Finis F. Conner, who had started out as Shugart's gofer at IBM.

In late 1974, as the new company fell behind in developing the now-familiar floppy, Shugart's venture backers booted him. Nearly broke, he moved to Santa Cruz, opened a bar with some friends, and bought a salmon-fishing boat. ``I had a tough time meeting my Porsche payments,'' he deadpans.

His luck turned in 1978, when Conner brought him the idea of developing small hard drives for the PCs then trickling to market. With $1.5 million in startup capital, Shugart, Conner, and four associates formed Seagate. The company caught the PC wave and rode it to $344 million in revenues by 1984.

The next year, amid brutal price wars, the honeymoon ended. While Shugart insisted on making drives from scratch, Conner argued that buying parts was less risky--and soon persuaded Compaq Computer Corp. to back the launch of Conner Peripherals. That company rocketed to $113 million in sales its first year. By the late 1980s, Conner considered buying Seagate.

``UP-FRONT GUY.'' Still, the gruff, hard-driving Shugart stuck to his guns. Buying Control Data Corp.'s surging Imprimis Technology Inc. in 1989 moved Seagate into more profitable mainframe drives. In 1991, after a brief battle for board support, Shugart ousted President David ``Tom'' Mitchell to focus even more closely on these lucrative markets. When PC demand exploded and key components grew scarce, companies following Conner's outsourcing strategy suffered; every drive maker except Seagate lost money in 1993. Conner was planning to sell his company off in chunks when Seagate approached last summer.

This year Seagate, including Conner, is expected to report revenues of $9.2 billion, up 104% for the year ending June 30, and profits could surge 130%, to $600 million. Wall Street has taken note. While rivals trade at 6 to 8 times earnings, Seagate trades at a multiple of 10--and could go as high as 13, says Robertson, Stephens & Co. analyst Jon van Bronkhorst. Before falling below 60 in the tech sell-off in early March, shares hit 67 1/8, up from 23 a year earlier (chart). Van Bronkhorst thinks 100 is within reach next year.

While Shugart is technically astute, colleagues credit his success to his managerial style, a deft blend of taskmaster and best buddy. He demands hard work but also understands the restorative value of hard play. He has always been famous for impromptu ``staff meetings'' at local bars. These days it's Malone's, known as ``Building 13'' at Seagate's 12-building campus in Scotts Valley.

Even more important is his ability to hire the right people at the right time, then win their loyalty with his candor. ``He's the most up-front guy I've ever worked with,'' says Vice-President Stephen J. Luczo, whom Shugart lured from Bear, Stearns & Co. to build the software business. Just ask former Vice-President Robert E. Martell, now president of drive maker Avatar Systems Corp. Days after demoting him in the mid-1980s, Shugart offered him a job running Seagate's young European unit. ``Don't answer me tonight, but keep it to 25 words or less tomorrow,'' Martell recalls him saying. Although angry at first, Martell decided overnight that Shugart was right. He went on to triple sales in Europe within a year and returned to the U.S. in a better position. ``I'd do almost anything Al asked me to do,'' he says today.

He's not alone, in part because Shugart balances his no-nonsense style with a huge appetite for fun. He and second wife Rita go on twice-yearly sprees to Las Vegas, where Martell says he has seen Shugart drop $70,000 at one blackjack table only to win $100,000 at the next. Shugart relishes his maverick image. He shows up everywhere, even at major industry conferences, in his trademark short sleeves. ``I don't wear a tie,'' he says, ``and I'm always politically incorrect--and I never do anything unless I enjoy it, or it does somebody some good.''

GADGET FREAK. One thing he enjoys is dabbling in other businesses. He owns a gourmet restaurant and an air charter service in Monterey, and he funds a publisher of quirky books that tickle his fancy--such as 75 Light Bulb Jokes. (``How many feminists does it take to screw in a light bulb? Answer: That's not funny.'') A gadget freak, he owns a hovercraft that he has never used, and his Pebble Beach home has more than 20 phones--four in the bedroom. ``We may have overdone it there,'' he says.

Although no shrinking violet, Shugart has recently been getting unwanted attention. Over the past decade, Seagate has been hit with three class actions brought by shareholder lawyer William S. Lerach, who accuses Shugart of insider trading. Seagate settled the first for $9 million rather than litigate, won the second pending an appeal, and awaits the third. Shugart has donated $255,000 to support tort reform initiatives on the California ballot on Mar. 26. In response, a lawyers' lobby has been running TV ads in which savings and loan felon Charles H. Keating Jr.'s mug morphs into Shugart's above the words: ``Protect yourself from the next Charles Keating.'' But Shugart, who has sued for libel, may get the last laugh. ``I'm not even interested in the money,'' he says. ``I'm interested in a personal apology.''

He got the last laugh in his rivalry with Conner, of course. While both men say the press exaggerated their animosity, Shugart's strategy was vindicated. ``Vertical integration was Al's thing from the beginning, so this is his crowning achievement,'' says Luczo. Says Conner, who will walk away with $9.5 million, not counting his stock: ``Of course I had some seller's remorse, but this should make Seagate the premier storage company in the world.''

Now Shugart must make the marriage work. There are major cultural differences, as the companies' headquarters suggest. Conner's marble-floored, art-filled office is known as the Taj Mahal, while Seagate's campus is unpretentious. Intent on having the blending complete by June, Shugart has already announced a product strategy and named Conner execs to key positions. ``They've done a good job merging the teams,'' says one Conner vice-president who was not asked to stay. ``They've got a powerhouse organization coming out of this.''

That leaves succession as the next, most obvious question. Preparing for one of his quarterly swings through Seagate's 50 offices worldwide, from Minnesota to Northern Ireland to Malaysia, Shugart dismisses retirement. ``What would I do?'' he asks. ``Travel?''

By Peter Burrows in Scotts Valley, Calif.


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Updated June 14, 1997 by bwwebmaster
Copyright 1996, Bloomberg L.P.
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