Applied is offering to swap 0.679 of its common shares for each share of Read-Rite. The exchange ratio, based on Applied Magnetics' February 21 close, carries a value of $37.50 a share for Read-Rite investors.
Read-Rite, which received the offer after the market's close, finished the day at 32 a share, up 3-3/4, while Applied closed at 53 a share, down 2-1/4.
Applied said it will also proceed with a consent solicitation, aimed at replacing Read- Rite's current board of directors with a new board that would favor the transaction.
Craig Crisman, Applied Magnetics chairman and chief executive, sent a letter to Cyril Yansouni, Read-Rite chairman and chief executive, explaining his decision to present the offer directly to Read-Rite's shareholders rather than its board of directors.
"In the course of our recent discussions, we have made clear our willingness to enter into a friendly, negotiated agreement to bring about this business combination," Crisman's letter states.
"We have, over the past 12 months, been respectful of your desire to proceed at a slow pace," he added, "but in light of the demands of a rapidly changing global marketplace and your apparent decision to delay further consideration of this combination, we have concluded that it is in the best interests of the stockholders of both companies for Applied Magnetics to proceed with an offer to acquire Read-Rite"
The offer may have caught Read-Rite off guard. "We were very, very surprised to receive this letter," said Steve Polcyn, a Read-Rite spokesman. "The companies have held discussions in the past about technology and the industry, but this is the first time we have received an offer [friendly or hostile] from a company."
Crisman's letter also outlined the benefits expected to arise from the merger. "The combination of Applied Magnetics and Read-Rite would create a company which would have greater operational and capacity planning flexibility and all of the advantages associated with greater scale. We view the highly motivated employee groups of both companies as critically important assets, and the combination will provide an increased level of opportunity and satisfaction for our combined employee group."
Under the proposed merger, the combined companies would have annual sales of $1.8 billion and a market capitalization of $3.4 billion.
But analysts say its hard to determine which way Read-Rite shareholders will go. After all, Read-Rite's investors would receive slightly less than a 52 percent stake in the combined company, while providing 67 percent of the revenues and 76 percent of the net fixed assets, said Richard Schutte, an analyst with Goldman Sachs.
"Shareholders will give up a disproportionate percentage of revenues and fixed assets to bet on Applied's management to run the combined companies better in the long run and achieve efficiencies and synergies," Schutte said. "I'm torn on what shareholders will do."
Some Read-Rite investors, however, have lost patience with the company. A shareholder lawsuit was filed against Read-Rite last December, claiming the company artificially inflated its stock price between April 1995 and January 1996 with claims of strong demand for its products.
During this period, Read-Rite's stock jumped from 18-7/8 in April 1995 to as high as 49-1/2 in early September 1995. Shortly after, the stock tumbled to around 17-1/4 a share as the company's products were delayed and demand softened, according to the plaintiffs.
Read-Rite, in its fiscal first quarter 1997, posted a drop in revenues to $251.6 million from $299.2 million a year ago. Profits shrank to $5.8 million in the quarter, compared with earnings of $42.6 million a year ago.
During the year, Read-Rite saw its share of the business at customer disk drive maker Western Digital slip to 35 percent in the first quarter from 60 percent a year ago, Schutte said. Applied Magnetics' share of Western Digital's business is nipping at Read-Rite's heels with a 20 percent cut.
Read-Rite's product delays contributed to the erosion of its business from Western Digital, Schutte added.
Polcyn, however, said Read-Rite is undergoing a major product transition and that its first-quarter results were an improvement over the previous quarter, when it posted a loss and revenues were down by 29 percent.