Verbatim Corporation Business Information, Profile, and History

History of Verbatim Corporation

One of the world's leading image and data storage media technology developers, Verbatim Corporation was one of the first manufacturers in the floppy disk industry, making its start several years after its founding in 1969. By virtue of a licensing agreement reached by the company's founder with International Business Machines (IBM), Verbatim began manufacturing floppy disks in the early 1970s, then went on to secure a dominant position in a market that would become intensely competitive. Based in Charlotte, North Carolina, Verbatim operated production facilities and sales offices throughout the world.

By the mid-1960s Reid Anderson had already devoted much of his life to his professional career. During the 1940s and 1950s, Anderson had spent 17 years working for Bell Laboratories developing electronic switching and storage devices, then moved on to NCR Corporation, spending two years there before arriving at the Stanford Research Institute, where he developed new products for an additional five years. Aged 46 when he ended his stay at Stanford Research Institute, Anderson was an unlikely candidate for entering into the frequently disappointing world of entrepreneurship, but in 1964 he did just that, leaving his position at Stanford Research Institute to start his own company. Although it would be another five years before Anderson pointed himself in the right direction, his first fateful steps in 1964 would lead to the founding of one of the world's preeminent companies in the computer disk industry.

While employed at Stanford Research Institute, Anderson had been working on developing new products for an assortment of companies, "essentially starting new businesses for various companies," as he would later reflect to Forbes. His entrepreneurial spirit aroused, Anderson used a transistorized metronome-tuner he had designed to launch his own small business making metronomes for musicians like himself, an amateur clarinet player. The confluence of hobby and profession worked well, but after three years Anderson came to the realization that he had exhausted the market for metronomes in his area and, consequently, began looking for another business opportunity.

Following his three-year metronome venture, Anderson teamed up with a business consultant named Ray Jacobson and formed Anderson Jacobson, which produced acoustic data couplers, devices that permitted computer data to be transmitted over telephone lines. Before long, however, Anderson was drawn to the lucrative possibilities of another product. After recalling his years at Bell Laboratories when he worked on the development of magnetized tape in cassettes, Anderson was hopeful that the relatively new technology employed in the production of magnetized cassette tape would realize tremendous financial gains for a savvy entrepreneur. Anderson approached his business cohort about the idea of changing their product line, but Jacobson balked at the proposal, leaving it up to Anderson to launch the business himself.

The year was 1969 and Anderson was in his fifties, preparing to establish his own company after two less-than-spectacular efforts. He borrowed money from a bank and convinced several friends and relatives to loan him additional cash, giving him enough capital to found Information Terminals, which would be renamed Verbatim and develop into the largest manufacturer of magnetic computer floppy disks in the world. Before Anderson's fledgling company would begin its meteoric rise, however, one essential ingredient needed to be added: Information Terminals had been founded to manufacture data cassettes, not floppy disks. Anderson made the pivotal switch to that product four years after starting Information Terminals when he realized data cassettes would soon be outdated by faster 8-inch floppy disks. Floppy disks, which were used for recording, storing, and retrieving computerized data, were a revolutionary product first introduced by IBM in 1973. Anderson approached IBM, asking the behemoth company if he could license the new floppy disk technology, and IBM, more concerned with selling its expensive computers than selling five-dollar disks, agreed.

Annual sales at Anderson's Sunnyvale, California-based company before and after the licensing agreement with IBM provided ample and tangible proof of the boon floppy disk production represented. Sales in 1972 were a respectable $480,000, but two years later Anderson's signal licensing agreement with IBM had driven his company's annual revenue total to $4.3 million. Earnings had spiraled upward as well, enabling Verbatim to net more than half of what it had grossed two years earlier. Among the company's products were 8-inch floppy disks and 5.25-inch floppy disks, both of which would drive Verbatim's annual sales upward during the 1970s. By 1976, the company's annual sales had nearly tripled in two years' time, jumping to $12 million. Three years later, in 1979, the same year Verbatim became a publicly owned company, annual sales surged to $36 million, and the following year sales eclipsed the $50 million mark.

Verbatim's growth during the 1970s had been incredibly vigorous, transcending Anderson's hopeful expectations and outstripping all other floppy disk manufacturers, but as the 1980s began Verbatim became a victim of its own success. Rapid expansion had engendered a sprawling, loosely organized management structure. Uninhibited success, which had flourished for a decade, bred a debilitating complacency, and quickly the company found itself in trouble. Annual sales, which had swelled exponentially ever since Anderson approached IBM about obtaining a licensing agreement, recorded only a modest gain at the beginning of the 1980s, inching from $50 million in 1980 to $53 million in 1981, one year after earnings had plunged 43 percent.

At the heart of Verbatim's lackluster financial results were quality-control problems wrought by lackadaisical production management and over-confidence that the future would be as bright as the past. The company had let its guard down and customers started to complain, beginning in 1980 when problems with Verbatim's floppy disks began to surface. Specifically, Verbatim had used an incorrect chemical formulation for the material used to coat their disks' media base, which was exacerbated by additional problems with the protective liner used in the disks' jackets. As the number of complaints mounted, Verbatim reeled and its once stalwart financial growth shuddered to a stop.

The company announced a massive recall of its faulty disks, establishing a $1.5 million reserve against returns, but a recall solved only one of the many problems that had spread throughout Verbatim. To eradicate the complacency that had deleteriously affected the company, Verbatim's board of directors voted for wholesale changes, hiring Malcom Northrup, a technology manager at Rockwell International's semiconductor division, as chief executive in January 1981 and relegating Anderson to the chairman's office, which he would occupy temporarily before making his final exit from the company he had created. In the wake of this major change in leadership, Verbatim's manufacturing and testing procedures were improved and automated, giving birth to a new high-quality Datalife line of disks, which were sold with a five-year guarantee, the first in the industry.

With a new production management team installed and quality-control procedures revamped, Verbatim surged back, recording a robust gain in annual sales from $53 million in 1981 to $85 million in 1983, particularly encouraging in light of the recessionary economic conditions characterizing the early 1980s. By 1983, Verbatim was touting itself as the world's largest supplier of floppy disks, supported by production facilities in the United States, Ireland, Australia, and Japan. The company's embarrassing episode with its customers had taught management a lesson, leading Verbatim to completely restructure its sales and distribution network to develop retail business, focusing on the end-user rather than distributors, software companies, and other manufacturers. As an essential part of this important strategic shift, the company launched a $4 million promotional effort in 1983, aiming its sales pitch directly at secretaries, small-business owners, educators, researchers, and computer aficionados, an audience Verbatim had previously ignored.

After the sweeping changes were completed, Verbatim once again stood on stable ground. The company trailed only IBM in the market for 8-inch disks, but held a commanding lead in the larger 5.25-inch market, making it the overall industry leader as the industry itself was set to expand substantially. In 1983 the floppy disk industry represented a $500 million market, a total that was expected to eclipse $1 billion by 1985 and reach $4 billion by the end of the decade. Considering Verbatim's number-one position in the industry and that floppy disk sales accounted for roughly 85 percent of its sales, growth prognostications such as those published in 1983 spurred expectations that the company would record commensurate growth. Ahead, however, were troubled years for Verbatim as floppy disk manufacturers became involved in a high-priced race to pioneer technological developments and as a global price war weeded out all but the strongest.

In 1985 Eastman Kodak Co., like numerous other large corporations, wanted to expedite its entry into the floppy disk business and share in the enormous profits that were expected to come. The company had introduced its own line of 8-, 5.25-, and 3.5-inch disks in late 1984, forming its Electronic Media Manufacturing division to superintend new business, but time was crucial and the company needed to quicken the pace. The acquisition of Verbatim presented Eastman Kodak with an opportunity to do so. In March 1985, Eastman Kodak announced its $174 million bid for Verbatim, promising to retain the company's management after its acquisition and to operate the floppy disk manufacturer as a wholly owned subsidiary.

Verbatim, meanwhile, had once again fallen on hard times, for painfully familiar reasons. Confusion about floppy disk media specifications for its largest customer, IBM, had led to the cancellation of future orders. This cancellation compounded the company's other ails, as laggard personal computer sales led to declining operating results for Verbatim. The company laid off 400 employees the week before Eastman Kodak announced its intention to acquire Verbatim, leading industry observers to speculate that Verbatim had sought Eastman Kodak out, hoping a parent company could alleviate some of its financial problems; however, it was never confirmed who approached whom first.

As the decade progressed, with Verbatim now operating as part of Eastman Kodak's Mass Memory unit, the floppy disk market became increasingly competitive, particularly because of the rapid rise of Japanese floppy disk manufacturers. By 1988, Verbatim had had enough and filed a complaint with the U.S. Department of Commerce alleging that Japanese companies were violating U.S. trade laws by selling their 3.5-inch disks at prices well below fair market value. In response to the federal inquiry triggered by Verbatim, three major Japanese manufacturers, Sony Corp., Maxell Corp., and Kao Corp., increased the competitive and pricing pressures they were exerting on U.S. manufacturers by opening production facilities in the United States and doubling production capacity. Adding further to Verbatim's difficulties were reported problems with the quality of its disks, which had been surfacing for a decade, preventing the company from securing large contracts with major software companies and computer manufacturers.

Against the backdrop of alleged dumping practices by Japanese manufacturers and Verbatim's increasingly precarious position, Mitsubishi Kasei Corporation, a Japanese chemical conglomerate that also manufactured optical disks and other information products, was assuming a more aggressive posture, hoping to establish a greater presence in both the U.S. and Japanese floppy disk markets as the 1990s began. Concurrently, Eastman Kodak was implementing a billion-dollar divestiture program aimed at shedding its noncore businesses. The common denominator in each company's divergent strategies was Verbatim, a nonessential component of the Eastman Kodak empire and an attractive asset for the acquisitive-minded Mitsubishi Kasei Corp. In a transaction valued at an estimated $200 million, Mitsubishi Kasei acquired Verbatim in 1990, making Mitsubishi Kasei the largest competitor in the U.S. market for floppy disks and a considerably stronger global competitor with the absorption of Verbatim's worldwide sales network.

With a new parent company supporting its growth, Verbatim entered the 1990s invigorated, intent on becoming a more well-rounded company. The acquisition of Carlisle Memory Products in 1992 and its entry in the memory card and CD-ROM markets helped to engender a significant transformation at Verbatim, as the company diversified from its mainstay floppy disk business to become what it termed the world's largest media manufacturer. In the three years since its acquisition by Mitsubishi Kasei, the company had introduced more new image and data storage products than any other company, introducing five new product lines, featuring 16 entirely new products, in 1993 alone. On the heels of this pervasive diversification, Verbatim formed a joint venture with Sanyo Laser Products in October 1994, creating one of the largest independent CD-ROM and audio-CD producers in North America.

Despite Verbatim's focus on developing innovative products and earning the reputation as one of the industry's premier manufacturers, competitive and pricing pressures continued to hound the company as it entered the mid-1990s. In November 1994, one month after forming its joint venture with Sanyo Laser Products, Verbatim laid off 100 employees&mdash′imarily production workers--at its Charlotte, North Carolina, facility. Conversely, the company established sales offices in Argentina, Chile, Columbia, and Venezuela in July 1994, hoping to capture a lucrative portion of the burgeoning South American computer market. Both Verbatim's retreat in Charlotte and its expansion in South America were indicative of the tenuous ground occupied by even the industry's largest players in the global battle for dominance, the rigors of which were not expected to lessen as Verbatim's management plotted their course for the remainder of the 1990s and beyond.