What’s the Future of Tandberg Data?

When you cut the head off a duck, it continues to run. But for how long? That’s more or less what’s happened to Tandberg Data, whose Norwegian HQ will be shut down even if all its subsidiaries will continue under the umbrella of a new holding company, TAD Holdings AS, owned by Cyrus Capital, and if Pat Clarke, CEO since January 2008, remains at the helm of a company that has changed hands. (Read the press release: Tandberg Data Filed for Bankruptcy in Norway)

With Tandberg unable to pay off its debt, in particular a $23 million four-year loan granted in 2006 by Cyrus, the latter has become the largest shareholder rather than lose its entire stake. The finance company has offices in New York and London, with a team of 33 people and $1.1 billion in managed assets.

Cyrus Capital’s trick was to put the parent company into bankruptcy, without dragging down its sales team or a portion of its foreign R&D team, thus hoping that the business could continue in the black, and ultimately seeking repayment of its investments. What about ultimately selling off subsidiaries? “No,” counters Bharat Kumar, VP of corporate development and marketing, who explains that Cyrus “is more focused on long-term investments.” He also suggests that no storage company expressed any interest in acquiring Tandberg.

Bharat Kumar

Why not get together with another firm in similar shape? Two invalids in the same sickbed might be able to compare symptoms in order to find a more effective cure. We’re thinking of Quantum, for instance, but especially of Overland, more complementary, since it also boasts an excellent technological background, and is better represented in the U.S., whereas Tandberg enjoys a stronger foothold in Europe.

Tandberg has two offices in Oslo, one for Tandberg Data, the other one for Tandberg Storage, the designer of the HH LTO tape drives, a sister company acquired last November by Tandberg Data, now a wholly-owned subsidiary. Currently the company offers an HH LTO-4. Will there be an HH LTO-5? Kumar did reveal that a skeleton R&D team will be retained in the new offices in Oslo. But the future of the company’s LTO technology has not yet been decided.

The new Tandberg will also hang on to its European sales center in Dortmund, Germany, along with other European companies in Paris, France, and Banbury, Oxfordshire, UK, as well as outlets in Japan, Singapore, and Boulder, CO. The latter is the U.S. home of continued R&D in tape automation and RDX products.

Could Tandberg become merely a reseller? Absolutely not, according to Kumar, who indicated that a new disk subsystem, the prototype of which was unveiled at the recent CeBIT, will be announced in a few days, with another coming later.

In the short term, the real problem for Tandberg lies with its major OEM customers and suppliers. Will Apple, Dell, Fujitsu HP, NEC and IBM continue to buy Tandberg’s products? “We’ve seen with all of them in recent days and we hope to keep them,” answers Kumar. He also mentions a new OEM for RDX in Japan, the name of which he wouldn’t disclose.

Bankruptcy implies that Tandberg’s heavy debts will be wiped clean. How quietly will current and largely indispensable vendors react, with the exception of those still dealing with the few remaining offices, to no longer having anything to sell?

The largest is sub-contractor Lafé Peripherals International in Asia, which manufactures nearly all of Tandberg’s products including RDX and tape drives and autoloaders. The situation is further complicated because last February, Lafé was acquired by Jparts Ltd.. “We continue to work with Lafé but we are going to add another manufacturer,” insisted Kumar. Nor do things seem particularly rosy for start-up ProStor, which owns the IP for the RDX and has enjoyed healthy royalties for the technology from Tandberg, the largest single producer of RDX drives.

Steve Georgis, founder and Prostor’s RDX GM, says he’s not at all worried, to the contrary: “Tandberg continues to be a strong ProStor and RDX partner. The ‘new’ Tandberg company now holds the RDX license and business should continue as usual. We do not expect the bankruptcy process to have any significant impact on the payment of RDX royalties to ProStor. We are hopeful that this restructuring puts Tandberg in a much stronger financial condition for future growth. The good news is that Tandberg will have an increased focus on selling RDX as they end-of-life VXA tape drive manufacturing in this restructuring. With every major PC-server OEM now selling RDX products, the entire RDX market is growing rapidly (more than 60% growth expected in 2009) and both of our licensees are benefiting from the market expansion.”

Tandberg got a loan from Cyrus, but also two others ones, $3 million from Imation and $1.7 million from Mitsui Sumimoto Bank.

Just how did the Norwegian firm find itself in such a terrible position? The answer is simple: like many others, Overland or Quantum to name just two, it missed or was late with the disk subsystems that are increasingly replacing tapes for backup.

The prosperous golden era of QIC drives with Imation for media and IBM as huge OEM, which began in 1982, has long since ended. The acquisition of Exabyte by Tandberg in November 2006 for $28 million was another colossal mistake, since 8mm helicoidal VXA would never find a large customer base. The venture with Imation in O-Mass for very high capacity tapes was a total disaster. In 2005, the company ventured with relative success into HH LTO design and manufacturing, after straying without success in DLT with Quantum.

To enter disk subsystems, Tandberg acquired Land-5 in 2002 and Computer Design Group in 2005, with no tangible product or results. What’s more, the sales team struggled with two kinds of media, both tape and disk, competing for the same backup applications. Finally, if there was little competition in the tape arena, that was not the case for disk subsystems and VTLs, which are legion, including some storage giants. The company  – as Imation – diversifies by entering an agreement with ProStor to manufacture and sell RDX removable HDDs. This business is growing with OEMs Dell and HP, as 100,000 RDX QuikStor units and 300,000 disk cartridges were shipped until November 2008 or less than two years after its introduction. But for 4Q08, this activity represents only 23% of Tandberg’s revenues to compared with 35% for tape drives, 21% for media and 15% for tape automation.

Consequently, Tandberg continued to amass yearly losses from 2006 on. In 2008, it generated revenues of $178.4 million, a decrease of $15.0 million compared to 2007, with a loss of $29.2 million compared to $44.5 million the year before. And its outlook for 2009 revenues is only $140 million to $160 million, although these figures could change, according to Kumar, who gave no indication in which direction it might vary.

The tape company was founded in March 1979 from the ashes of Tandberg Radiofabrik, born in 1933, a leading manufacturer of audio tape devices, after suffering bankruptcy and the suicide of its founder, Vebjørn Tandberg. It’s a little-known fact that at that time, the company produced a professional reel-tape audio device of extremely rare quality. As early as 1972, Tandberg Radiofabrik released its first computer tape product, the TDC 3000, a start-stop reel-to-reel tape drive.

From this point on, with the demise of Plasmon and Tandberg currently in bankruptcy, there are no remaining European manufacturers of storage hardware.