Chapter 7 - Data Communications: Market Order 1973-1979
7.6 ADS: Rebirth as Micom 1973-1976
In 1973, ADS, once the rising star of data communications, closed its doors. Neither Norred nor any Rockwell executive willing to risk his reputation on the now soiled investment could induce even a hint of interest in it either as a business or as a distressed sale of assets. In March 1973, Rockwell management, tired of explaining to themselves why they tolerated a business without any prospects of generating income sufficient to cover even the interest on Rockwell’s debt, skipped filing the customary Chapter 11 bankruptcy and discharged ADS into a let’s-get-it-over Chapter 10 bankruptcy.33 Rockwell flew an executive to London to inform their UK distributor, Case LTD, their one important customer, of their decision.
Roger Evans, the Case executive responsible for data communications, and thus the Rockwell relationship, first reacted with dismay. For any day, Evans had been expecting to hear Case and ADS had won a multi-million dollar order for ADS 670 multiplexers from the British Post Office (BPO, to become British Telecom).34 Evans quickly reasoned, however, that if Case bought the rights and assets to the multiplexers from Rockwell, then Case eliminated BPO’s sole objection: the multiplexers were not sourced or manufactured in the UK. It would also initiate Case’s metamorphosis from distributor to manufacturer, an evolution always contemplated yet never thought possible. Evans had to see Norred; for any plan to be work, he and Case needed Norred.
Norred too considered picking up the pieces of ADS and plowing ahead. With bankruptcy wiping out the debt, and thus the ongoing interest expenses, there just might be enough revenue to generate a small profit. The critical assumption hinged on Case, for without their business, the numbers simply did not compute. There his thoughts generally ended. The conservative engineer in him called an end to such daydreaming and reminded him he needed a job. He figured that he better call Carr at Codex, who he knew from trying to sell ADS, and who had left him feeling that he would hire him if given the chance. Then came Evan’s call.
Evans and Norred cut to the chase. Evans wanted Norred’s help and proposed Norred assist Evans and Case’s lawyers specify the assets and intellectual property needed to satisfy the on-going needs of Case and the hoped for contract from BPO. Case would assume all the costs and legal responsibilities of working with the bankruptcy court and, if successful, Case would then contract with a company Norred would form. Only as the weeks passed, it appeared their efforts had been in vain. Norred recalls:
Almost as a final ditch effort, we made a proposal to the receiver to buy half of the inventory and to acquire a non-exclusive manufacturer’s license for the product line, and he accepted it.35
On hearing the good news, Norred and Evans met in Evans’ hotel in Woodland Hills to celebrate and decide upon their next actions. Evans wanted to return to England as soon as possible with a contract executed with Norred’s new company to show BPO and secure the contract. Evans pressured Norred to name his company so a letterhead could be created on which to document their relationship. Exasperated, Norred said, “why don’t I just call it my company?”which he then shorten to Micom. Norred remembers:
It was just a business opportunity, with no real business plan whatsoever. I owned 100% of the company and put a little cash into it, I think $20,000, just so it would have a little equity on the balance sheet, and the company literally was a company in support of Case.
For the next two and one-half years, Norred and his small company of never more than a dozen employees survived by manufacturing and servicing formerly ADS products for Case while they:
dabbled and diddled around with some microcomputer-based products as well as other communications interface products that we tried to sell, not terribly successfully, frankly.
Norred knew he needed to create new products. Depending almost entirely on Case for his marketing and sales, he naturally tried to incrementally innovate products Case had already sourced from other manufacturers in hopes of replacing them. Rarely did he meet with success. Desperate to find products to create and sell, Norred turned his attention to products interconnecting the multiplexers he already sold. Norred remembers:
The minicomputer manufacturers were all very poor at data communications products. So I decide there was a market opportunity. We had all these remote multiplexers and we could do all this very powerful networking with a very simple interface. The only flaw was – we tried to sell it to Data General and to everybody – was lack of software support; we never really were very strong in software. We recognized it, but never made any attempt to resolve it, and as a result, we never went anywhere.
By late 1974, Norred even thought hard about leaving data communications and doing something he would enjoy more: “I never did like the data communications business.” But as he tried other ideas on, he kept returning to what he had been doing for the last six years and decided that the opportunities in data communications simply too “interesting.” Resolved to grow Micom, he again tried to raise venture capital. He remembers:
1974, ‘75 was, I believe, the all time low ebb for venture capital. Frankly, I don’t recall having maybe more than one meeting with anybody that had any interest in investing in Micom. I couldn’t get any attention from anybody. We didn’t represent in our business plan anything particularly unique or new, we looked like a ‘me too.’ By my nature, I suspect, the numbers that we presented were conservative – we tended to meet our numbers – and most venture capitalists, in my mind, always take them, divide by three or something, and so we were unsuccessful. The decision I took was to go after what I call the custom phase of our business. The strategy was to find people who would be willing to pay us for the development of a data communications product that they couldn’t buy on the open market, but needed badly enough that they were willing to pay somebody else to design it and manufacture it for them. The first one of those was a company called Datran.
Norred knew marketing and selling were not his strengths. Yet neither could he find someone to hire; everyone he talked to sounded all too willing to spend money he did not have. So while he sought new customers to fund new products, his most reliable source of revenue and new product ideas remained Case. Evans remembers:
I was concerned that we were becoming unacceptably dependent on the R&D coming from Micom, and Bill was having a hard time putting a real company together. He never really found a marketing guy before that he felt he could work with the way he felt he could work with me. So we put together a deal whereby Case was going to invest in Micom – a minority position. It was a complex deal where other European investors were going to get involved too. I was going to come over here as the guardian of that investment, but also to add the marketing ingredient to Micom and, perhaps, sell some of the Case products we developed in the UK over here.
Evans joined Micom in May 1976, shortly before the scheduled closing of the Case-led investment. Norred tells what happened next:
I can recall very clearly looking out the window one day and seeing Derek Levell, who was the joint managing director of Case, coming up the parking lot to Micom, and I wasn’t expecting Derek. He was there to give me the good news that they had run into some financial difficulties that they hadn’t anticipated. And they would not be making the investment in Micom, and that, because of their financial difficulties, they were going to be curtailing or eliminating a substantial number of the development contracts that we had with them.
As a founder of Case, Evans could have returned to England, but “decided to cut the cord and stay here anyway.” He focused on Datran, which quickly became Micom’s leading customer, while trying to find other customers. Then came another blast of unwelcomed news: On August 26, Datran, owing Micom $110,000, 80% of their accounts receivable, filed for bankruptcy. Evans recalls the shock: “The day they filed, we decided we had two weeks in order to raise some money or we were out of business.”
Norred and Evans scrambled to find capital investors to save their company. They contacted a number of venture capitalists before abandoning the idea. Then they focused on finding a corporate investor, hopefully to make a minority investment but, failing that, to acquire their small ten-person firm. They contacted Vadic, a supplier of modems to many of the same manufacturing representative firms they used. Vadic would hire them but had no interest in buying their company. They contacted Case, but generated no interest. They thought of calling Carr at Codex.36 Then a business broker introduced them to John M. Thornton, the chairman of the board of Wavetek, a company on a recent spree of acquisitions. Thornton proposed the investment to his board, which turned him down. Unwilling to let what he regarded as a potentially good investment get away, he asked for, and received, permission to make a personal investment in Micom. In September 1976, acting as agent for a group of investors including David M. Goodman and Martin B. Ortlieb, Thornton advanced a loan of $35,000, invested $2,160, and made a line of credit of up to $200,000 available in return for 51% of Micom.37 Norred and Evans had once again eluded disaster.
Knowing that if they did not settle on a successful strategy soon they would be living a repeat of the past month, they strained to craft a scenario both realistic and likely to succeed. The recent flurry of statistical multiplexer announcements by Codex, Infotron, DCA International, and Timeplex dated their TDMs. To innovate a statistical multiplexer, however, meant becoming a systems supplier with large sales and service organizations, a strategy they thought beyond their means and interest. But to bank their future on continuing to do more of the same seemed sure to invite failure. They considered selling inexpensive data communication products by catalog, but decided to stay the course for a few months longer while Norred continued working on other potential products. If nothing came of their efforts, they would get into the catalog business.
Norred: “The problem was that the company had so much debt that, as a result of the interest on the debt, it was causing the company to lose lots of money. If you could take the debt away, it was a very profitable business at that time, but with the debt, Rockwell just finally got tired of it. They saw that they didn’t want to put more money in it. They didn’t see it working its way out of it. They couldn’t find anybody to buy it.”
Evans had reason to be optimistic as this new order followed a $2 million dollar procurement by BPO of ADS 660’s let in October 1971; one of the largest orders ever received by ADS.
Livermore Data Systems also acquired rights to ADS’s product line (Datapro September 1973 pg. 70G-500-01b
Carr remembers: “We saw Norred and Micom as a significant potential acquisition, but we could never quite get him over the threshold. I don’t know how many times we romanced in the moonlight and we got to the door and then he kept the key. In fact, the last time, he had a list of people, he told us later, that he was calling to try to raise money, and there was a guy in southern California that was the name above ours on the list, and when he called him, he agreed to guarantee loans for a piece of the company, so he didn’t call us, but if John hadn’t answered the phone, I’m quite sure that time Codex would have acquired Micom because we were ready.”
Technically, a new corporation, JMT Corp. became the successor corporation and not until November 3, 1977 was the name changed back to Micom Systems, Inc