Storage: Quantum Corporation Moves to Strengthen Leadership Position in Information Storage Industry - Company Business and Marketing

Edge: Work-Group Computing Report, March 8, 1999

Quantum Corporation, a leader in the rapidly growing information storage industry, Monday announced a broad strategy to accelerate its growth in the storage systems business, including tape automation, and strengthen its position in the hard disk drive (HDD) market, where it has been the leading volume supplier in the desktop segment for the past five years.

As a supporting financial step in executing the strategy, the company is also proposing to replace its existing common stock with two classes of tracking stock. If approved by shareholders, the tracking stock is intended to reflect the separate performance of the company's two major businesses, hard disk drives, and DLT & storage systems. Quantum would become the first technology company based in Silicon Valley to employ tracking stock.

Storage Systems Strategy The strategy Quantum announced Monday will accelerate its diversification process with several new initiatives in the storage systems business. First, Quantum plans to extend its automated tape library business further into enterprise-level storage area network applications, and offer the industry's first flexible combinations of disk and tape storage within a single system. Second, Quantum is preparing to enter the rapidly emerging market for storage appliances later this year. This new class of product is aimed at the workgroup level, and promises greatly improved ease-of-use and flexibility for end-users implementing storage solutions. Third, Quantum is developing system software to provide intelligence in future storage systems and storage devices. Activities in this area have enabled the company to take an early lead in demonstrating self-configuring disk drive appliances within the Jini network architecture being developed by Sun Microsystems.

Chairman and CEO Michael A. Brown said that the storage systems strategy will allow Quantum to build on the industry's broadest range of storage devices and begin offering systems- and solutions-level storage products and services. In doing this, he said, the company expects to strengthen its position within the storage industry value chain.

"There is an explosion occurring in the demand for storage capacity," Brown said. "It's being fueled by the rapid growth of digital content -- data, video and audio -- along with the pervasiveness of networked computers, and the phenomenal rise of the Internet. As a result, the worldwide demand for storage is growing by 100 percent a year, making it the fastest growing segment of information technology.

"These trends are dramatically increasing the need for high quality, reliable and intelligent storage devices, storage systems and storage solutions. Quantum is already addressing many of these diverse needs through leading positions in the disk, tape, solid state and tape automation markets, and we intend to strengthen our industry position as we grow our storage systems business."

Tracking Stock Strategy According to Brown, Quantum plans to issue tracking stock as the financial tool that will enable the company's strategy. Tracking stock recognizes that financial markets value differently the two businesses in which Quantum is engaged.

"While Quantum remains a single corporation, tracking stock enables the financial markets to value more accurately the earnings potential of our two distinct businesses," Brown said.

"We believe tracking stock is the best option of all the different ways of linking stock value directly to business unit performance. It gives us the financial advantages of separate valuations without the loss of shared strategy, technology, brand and company infrastructure."

If the plan is approved, shareholders would receive one-half share of the hard disk drive-based stock and one share of the DLT & storage systems-based stock for each share of Quantum common stock held. The two classes of tracking stock would comprise the company's common stock. Quantum would continue to be one company with one board of directors and one senior management.

Tracking stock -- sometimes called "targeted stock" or "letter stock" -- is a financial instrument that has been used successfully by several Fortune 500 companies, including General Motors, Sprint and USX (U.S. Steel).

While Quantum is the first Silicon Valley company to use tracking stock, as of this year a total of 15 companies have employed the technique, with some $395 billion currently outstanding or pending. All major institutional investors have tracking stock in their holdings.

Tracking stock is considered most appropriate when a company has distinct businesses that are valued differently, each business would have a large market capitalization individually, and there is a strategic benefit to keeping the businesses together in a single company. Brown noted that Quantum easily meets all three of these criteria, making it an ideal financial structure for the company.

Quantum is preparing to file a preliminary proxy statement with the Securities and Exchange Commission. Shareholders will be asked to approve the plan later in 1999. Solicitation of shareholders will be made by proxy only. If the plan is approved, the new stocks would begin trading shortly thereafter. Brown estimated that the process would require four to six months to complete.