March 13, 1997 1:45 PM ET
March modem madness: Hayes to buy Cardinal
By Scott Berinato

  Hayes Microcomputer Products Inc. will announce later today that it plans to acquire competing modem maker Cardinal Technologies Inc. in a cash buyout.

In a separate transaction, Vulcan Ventures Inc., which owns 75 percent of Cardinal shares, announced it will invest in Hayes as well. Cash figures were not disclosed.

Cardinal, of Lancaster, Pa., will become a wholly owned subsidiary of Hayes, and its facility there will be closed. Production will move to Hayes' Norcross, Ga., facility.

Hayes CEO Joseph Formichelli said the move "will enhance profitability of [Cardinal's] products immediately."

Cardinal employees will be notified today. Some will be offered transfers, while most will receive severance packages, Hayes officials said.

"This has occurred very quickly," said company founder Dennis Hayes. "About two weeks ago we started really looking at the situation. Then we spent all week last week up there, and today the letter of intent was signed."

Cardinal recently went through a period of layoffs and was planning to move its RedWing chip division to Vulcan, a Seattle-based development company headed by Microsoft Corp. co-founder Paul Allen. The RedWing group is developing a chip to make Cardinal's analog modems upgradable to ISDN, said a spokesman for Cardinal.

Hayes officials had no comment on the Vulcan/RedWing situation.

Cardinal CEO Frank Leonardi said the company stepped up its efforts late last month to find a partner. "We know we've got to get bigger. We're strong in the U.S. market, but we're not as strong internationally," Leonardi said.

An interesting twist to the buyout is that Cardinal supports U.S. Robotics Corp.'s x2 56K-bps technology with its Connecta line of modems, while Hayes backs the competing K56Flex technology. As yet, the two will not interoperate.

"This would give Hayes the option of some quick-to-market x2 products," said Virginia Brooks, an analyst at Aberdeen Group in Boston. "This provides Hayes with two paths to go down."

"We're definitely still committed to K56Flex and the Open 56K Forum," Hayes said. "If there's an opportunity to get the camps together, we will do that. Meanwhile, the Cardinal products have been supporting x2. That gives us the ability to offer a choice to users. If their company selected x2 until a standard is done, we'll supply them with x2."

At least one K56Flex partner viewed the move as positive.

"I think this is a good move for Hayes, and I don't think there will be much conflict with products," said Bob Rango, general manager of the modem and multimedia group at Lucent Technologies Inc. in Huntington Beach, Calif.

Rango added that he didn't expect Hayes' support for K56Flex to waver.

"[The Open 56K Forum members] know we're coming down on the side of K56Flex for a standard," Formichelli said.

The deal could be the beginning of a trend, another analyst said.

"I think there is commoditization in the modem market, and it's very tough to play at the low end, like Cardinal," said Vern Mackall, an analyst at IDC/Link in New York. "So you expect to see mergers and acquisitions in this space. From Hayes' point of view, they're looking for shelf space."

The deal is expected to be completed within a month, said Hayes officials.

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