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Iomega to buy SyQuest's assets, end suit

The removable drive maker will purchase SyQuest's intellectual property and U.S. assets, ending pending patent litigation.

Iomega will purchase SyQuest's intellectual property and U.S. assets for $9.5 million, bringing to a close the pending patent litigation between the two companies and providing a glimmer of hope for SyQuest customers.

Over the last year SyQuest had steadily lost market share to Iomega in the removable storage market while suffering increasingly larger quarterly losses. Iomega dominates the market with its Zip and Jaz removable drives.

SyQuest announced widespread layoffs last August as part of a restructuring plan before finally shutting its doors and suspending operations in November after failing to secure additional lines of credit. The company filed for bankruptcy in November, reporting assets of $36.9 million and $85 million in debt.

In its Chapter 11 filing November 17, SyQuest said it was selling the bulk of its assets to a strategic buyer but did not name the party. Today the companies confirmed that Iomega will purchase SyQuest's assets for $9.5 million in cash.

Iomega will purchase SyQuest's computer equipment, printers, office furniture, and all finished goods. Iomega is also seeking to acquire SyQuest's Malaysian assets, which include a manufacturing plant. The acceptance of Iomega's offer for the Malaysian assets is a condition of the U.S. deal.

SyQuest recently relaunched its Web site to offer customers product and servicing information, but Iomega is not purchasing any of the company's accounts. SyQuest said in a statement today that it will shortly add support resources, ostensibly through a third party.

The deal may have been a smart one for Iomega, analysts said, effectively removing the risk that SyQuest's technology could be purchased by a potential competitor while steering clear of the bankrupt company's debt and liabilities.

"They didn't buy the debt, they just bought the product line and inventory," said Jim Porter of industry newsletter DiskTrend. "It enables Iomega to do this at a modest cost and maybe make a few bucks, so it looks like an intelligent move for Iomega."

The deal effectively ends the pending patent suit filed by Iomega against SyQuest in Delaware and Paris. Iomega alleged that the technology in SyQuest's SyJet and Spark product lines infringed on its registered trademarks and patents.

"If that technology were to be purchased by another party, we would just have an intellectual property battle on our hands with that entity," said Laurie Keating, general counsel for Iomega. "There is some benefit in avoiding the expense and resource strain of ongoing litigation."

This is not the first time Iomega has chosen to purchase a company's assets rather than continue with costly legal action. Last June, the company bought a $21 million stake in French drive-maker Nomai while settling the patent infringement suit it had filed against the company.

"Basically, they decided it would be cheaper to buy the company than pay the lawyers," Porter said, in reference to the Nomai investment.

Iomega is still operating Nomai's businesses but has not yet decided whether to continue manufacturing SyQuest products. "Iomega will utilize some of SyQuest's technology in our future products, and we're evaluating whether it makes any sense in terms of continuing SyQuest products," Keating said.

"They must reach some management decisions about what they want to do with the parts of SyQuest they bought," Porter said. "Do they produce the cartridges and keep the market that exists active for some foreseeable future? Or do they say, 'I'm not going to bother with this?'"

The U.S. Bankruptcy Court will hold a hearing Tuesday to establish sales procedures for the sale of the assets. The deal is expected to close in the first quarter. Iomega will recognize the deal as a separate purchase excluded from the company's fourth quarter earnings, Keating said.