The King Of Modems Has To Hang Up

On June 19, Dennis C. Hayes sat in shirtsleeves in a secluded conference room at Atlanta's Hartsfield Airport, staring across a table at the top brass of a rival company one-third the size of his own. This was Hayes's Waterloo, his worst nightmare. After five hours of negotiations, he had agreed to give up control of Hayes Microcomputer Products Inc., the company he founded and largely owned.

Ten days later, Boca Research Inc. announced it would buy Hayes Microcomputer for $48.9 million in stock plus the assumption of $42 million in debt. The deal ended Hayes's spectacular entrepreneurial run in the $1.6 billion North American modem market. His company had identified a niche, then ridden the personal-computer wave to success. But as clones and low-cost contenders seized the market, Hayes Microcomputer was slow to respond to price competition. Then, lack of sophisticated financial management, operational missteps, and its founder's blind drive sealed the company's fate.

"INTUITION." Dennis Hayes, 45, is a soft-spoken, reclusive man. Tall, beefy, and shaggy-haired, he has a passionate appetite, associates say, for control and privacy. He started Hayes Microcomputer in 1977: During time off from his job as a communications engineer, he and co-worker Dale Heatherington tinkered on Hayes's dining-room table with electronic parts that allow computers to talk to one another on phone lines. The two Georgia Institute of Technology grads traded Heatherington's $3,000 in savings for components to build the gadgets, marketing them in computer hobbyist magazines.

The enterprise soon outgrew Hayes's house, moving to Norcross, an Atlanta suburb. And in 1981, Hayes Microcomputer hit it big with the launch of Smartmodem 300, which automated the process of dialing and answering calls. By 1984, the company was pulling in $150 million in revenues. To keep up with booming demand, Hayes took a huge financial gamble, spending millions to add capacity and automate plants

--against the recommendation of his chief financial officer at the time, associates say. "Dennis tended to run the company based on intuition," recalls John A. Copeland, a former Hayes vice-president for technology.

A band of upstarts, however--such as U.S. Robotics, Zoom Telephonics, and Boca Research--were appearing on the modem scene with products offering high performance at far lower prices. Before long, consumers were choosing "Hayes-compatible" knockoffs over the high-priced originals. "If you could get a Mercedes for the same price as a Chevrolet, what would you buy?" Hayes asks in hindsight.

TOO LATE. He tried to fight back. In 1989, Hayes bought a low-price competitor, Practical Peripherals Inc. He launched an overseas expansion, hoping to piggyback PC growth overseas. Then, just as its two-year-old economy line began to make inroads in mass-merchant outlets, Hayes was hit with production snafus that choked its output. Profits thinned dramatically, finally turning into losses in the quarter that ended in September, 1994. By November, the company had $15 million in cash but $45 million in trade debts. Its bank refused to lend the additional $10 million that Hayes thought the company needed to survive. On Nov. 15, Hayes filed for Chapter 11 bankruptcy protection.

Even in bankruptcy, Hayes thought he could save the company on his own. He consolidated manufacturing and replaced subcontractors that delivered late. Hayes's revenues continued to grow (chart), and profits returned. But the results didn't come fast enough. Finally, in April, under pressure from creditors--which included Rockwell International and AST Research Inc.--the entrepreneur brought in investment bankers Robinson-Humphrey. The firm, which had worked for Boca on a secondary offering, put the two companies together.

The airport meeting set in motion a merger that promises to create one of the industry's largest players. Dennis Hayes will be vice-chairman of the merged company, which still will bear his name, and his 14.7% stake will be worth $43 million. But the transaction will value Hayes Microcomputer at

just 36 cents for every $1 of sales. The market capitalization for rival U.S. Robotics Inc., by contrast, is five times sales. "You look at that and say: `Gee, did Dennis leave that on the table?"' says Rod Dowling, director of corporate finance at Robinson-Humphrey Co. Years ago, Dowling, like others, practically begged Hayes to take his company public. Hayes's desire for privacy got in the way. It cost him dearly.

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