Dr. Fix-It and the High-Tech Rescue That Went Awry

Quentin Thomas Wiles used to be known as “Dr. Fix-It” because of his successful rescues of sick high-tech companies. Wiles was roving trouble-shooter for the San Francisco investment and venture capital firm Hambrecht & Quist, which made a reputation for investing in near-bankrupt or start-up high-technology firms.

In 1985 he was sent in to turn things around at MiniScribe, a Longmont, Colo., computer disk drive maker. William Hambrecht, president of Hambrecht & Quist and a MiniScribe director, said Wiles, 70, went to MiniScribe determined “to show them one last time that he was the best there is.”

Wiles’ magic seemed to be working. MiniScribe reported that its sales soared from $115 million in 1985 to $603 million in 1988; it went from a loss of $16.8 million to earnings of $25.8 million.

But today Hambrecht calls MiniScribe “a Greek tragedy.” Steven Sidener, a San Francisco attorney who represents a shareholders group that is suing MiniScribe, Wiles and Hambrecht & Quist for alleged securities violations, put it another way. “What happened at MiniScribe is an outrageous fraud,” he said.

Fraud Charged

According to a report issued by Mini-Scribe’s new management, installed by Hambrecht & Quist, former management took part in “a massive fraud” and the company’s reported sales and earnings for the last three years were inaccurate. Things were so out of control, the report says, that at one point bricks were packaged as finished disk drives and sent to customers in order to temporarily boost sales and inventory numbers.

The report, which has been given to the Securities and Exchange Commission’s enforcement division, doesn’t specifically accuse Wiles of fraud. But it offers a stinging indictment of his management. Not surprisingly, MiniScribe’s stock has collapsed, from a high of $13.75 in 1988 to $1.625 at Monday’s close.

Wiles, who through his attorney has denied any knowledge of the fraud, quit as chairman of MiniScribe and resigned his post as vice chairman of Hambrecht & Quist in February.

Since then Wiles, a resident of Sherman Oaks, has dropped out of sight. “This has been quite a trauma for him,” said Wiles’ attorney, Cary B. Lerman. The phone at Wile’s office on Ventura Boulevard in Sherman Oaks has been disconnected and the name of his company has been removed from the office door.

But for all of the problems at Mini-Scribe, the puzzling part is that Wiles employed many of the same techniques there that he did at a dozen or more companies he successfully nursed back to health.

His methods often were considered harsh, but they usually worked. At such companies as Milpitas-based ADAC, a maker of medical equipment; San Jose semiconductor maker Silicon General; Rexon, a Manhattan Beach data storage business, and Granger Associates, a Santa Clara telecommunications firm, Wiles worked his magic. All those companies were losing money or were marginally profitable when Wiles arrived.

Found ‘Soft Spots’

“I’ve never met anyone who’s better at forcing organizational problems to the surface,” said Hambrecht. Wiles “had an intuitive sense of what the soft spots were.”

Under Wiles’s stewardship, for instance, ADAC went from a loss of $33 million in 1984 to $4.3 million in net income in 1987, and was recently named “Turnaround of the Year” by the Cary, N.C.-based Turnaround Management Assn.

So what went wrong with Wiles at MiniScribe?

“I think MiniScribe got too big for his system,” said William (Dan) Rasdal, a former Granger executive. Rasdal, now president of Silicon General, noted that MiniScribe is five times bigger than other firms Wiles managed. “When you move into a company like Granger, it’s not too hard to break it down into pieces and make sure you’re on track.”

MiniScribe’s internal report also indicates that Wiles lost control of the firm simply because he wasn’t there often enough. Wiles wanted to spend more time at home with his wife, who suffered a heart attack a few years ago, said Edmund H. Shea Jr., a Rexon director and executive vice president of J. F. Shea, a Walnut, Calif. construction firm. MiniScribe officials say that Wiles visited the firm once a quarter or less often.

In contrast, during Wiles’ turnaround of Granger, Wiles owned a home nearby and would visit the company about four days a week, Rasdal said.

Hambrecht says it’s apparent that Wiles kept up the pressure of his crisis management techniques long after MiniScribe was in a turnaround phase. “This experience has reinforced for me that it’s important to separate the turnaround effort from the later ongoing management effort,” he said. “I think the intensity of effort that goes into a turnaround is either wasted or it distorts things later on.”

Hambrecht also said MiniScribe’s managers were guilty of hubris. “They were the darlings of the industry and Wall Street and they started believing their own press clippings,” he said. “They believed they were almost immune to cycles in the disk drive business. So when things did cycle down for them, they kept driving forward, assuming they’d be able to pull it out and continue to grow.”

‘Q.T.’s Disciplines’

No matter the company, however, Wiles relied on “Q.T.’s Disciplines,” a 12-point guide to management fundamentals bearing his initials, and “Q.T.’s Method of Operation,” an eight-point list for identifying problems and solutions.

He eliminated divisions such as production and finance and reorganized firms into small units, each of which was responsible for a product from start to finish. Division heads were held accountable for “making the numbers”--or meeting goals--at quarterly “dash” meetings. These meetings often became heated, former associates say, with Wiles confronting managers who didn’t meet their goals.

At one such meeting at Granger, an unhappy Wiles kicked a manager’s written report out of the room. “Everyone at the time thought it was eccentric behavior,” said Rasdal. “But they got the point. It was his way of teaching.”

From his Sherman Oaks office, Wiles would keep track of his firms through color-coded folders and would stay in touch by phone and fax. He would often make drastic cuts at companies, laying off workers and trimming operations.

Hambrecht suggested that compounding the problem at MiniScribe was the fact that Wiles’ lieutenants--such as Rasdal and Michael Preletz, who now runs Rexon--had left his turnaround team. That left Wiles with younger, more inexperienced managers who were unused to Wiles’ demanding style.

‘Very Intimidating’

“Q.T. can be very intimidating to a young person,” Hambrecht said. MiniScribe executives “were more inclined to tell him what he wanted to hear than what they really thought,” he said.

It also turned out that Wiles’ marketing strategy at MiniScribe didn’t work. To capture a bigger slice of the competitive market for disk drives--the boxes that store and retrieve data for computers--MiniScribe started making more expensive drives. In doing so, said John T. Rossi, an analyst at Alex. Brown & Sons, “They took their eye off the ball and neglected their bread and butter business” of mid-range drives.

When the expected demand for the high-end drives didn’t materialize, business took a sharp downward turn. MiniScribe reported its first loss in more than three years in fourth quarter 1988, showing a $14.6 million deficit.

A former MiniScribe employee, who didn’t want to be identified, described a chaotic work environment during that period, in which he would constantly be uprooted from a project before it was completed to work on another. “They probably lost 100 people like me,” he said.

Although Hambrecht said Wiles was proud of his ability to steer new products, others indicate he might not have been as closely in touch with products as has been portrayed. “I don’t believe he understood our technology to any great depth,” said M. Bruce Nakao, chief financial officer of Adobe Systems, a Palo Alto software firm that Wiles managed from its start-up phase.

‘Wrong Signals’

Critics also charge Wiles with sending the wrong signals to managers. Wiles “understood how investors respond to an appealing story,” said analyst Rossi. “People were doing what was necessary to perpetuate the story” of a successful turnaround, he said.

Wiles was carried away with his success, Hambrecht admitted. “We all tried to talk Q. T. into slowing it down.” The tragedy was, he said, that it could have had 25% less growth “and it still would have been the best ever.”

Wiles, who didn’t respond to requests for an interview, was born in Weeping Water, Neb. After graduating from the University of Nebraska with degrees in mathematics and chemistry, he worked for electronic products maker Goodall-Electric Manufacturing in Ogallala, Neb., and eventually took control of the company. When it was sold in 1960 to the Cleveland-based industrial conglomerate TRW, he went along and began his career as a trouble-shooter, turning around several ailing TRW companies.

In 1970, he left and joined Hambrecht & Quist. Early on Bill Hambrecht decided that Wiles “had a very special talent” for turning around disorganized companies.

Hambrecht said he had been angry at Wiles over the MiniScribe fiasco but the anger has begun to dissipate. He last talked to Wiles a few weeks ago and said that Wiles remains very despondent.

One reason for that, Hambrecht said, is that “He has a total intolerance of unresolved problems.”

Unfortunately, MiniScribe problems are far from resolved.

Q.T. WILES’ REPORT CARD Quentin T. Wiles, former chairman of the investment banking firm Hambrecht & Quist, won a reputation as “Dr. Fix-it” by turning around ailing high-tech companies and helping new firms become successful. But his reputation has lost its gloss. Last winter Wiles quit as chairman of MiniScribe, a Colorado computer company. Since then the company has said its senior management was responsible for “a massive fraud” and that its hefty profits and sales figures for the past three years were inaccurate. Wiles and the company have also been sued by shareholders. Before MiniScribe’s fiasco, though, Wiles had a virtually unblemished record of nurturing sick high-tech companies back to health.

Wiles’ Company Industry years MiniScribe Disk drives 1985-89 Silicon Gen. Semiconductors 1972-89 ADAC Labs. Medical systems 1984-87 Rexon Data storage 1984-87 Adobe Systems Software 1984-89 Granger Assoc. Telecomm. 1980-84 Margaux Cont. Mgmt. systems 1983-85 Zymed Medical equip. 1981-84

Company Industry Sales Growth MiniScribe Disk drives $114 million-$603 million* Silicon Gen. Semiconductors $3.4 million-$35.9 million ADAC Labs. Medical systems $51 million-$60.8 million Rexon Data storage $20.3 million-$101.4 million Adobe Systems Software $2.2 million-$83.5 million Granger Assoc. Telecomm. $20.6 million-$71.3 million Margaux Cont. Mgmt. systems $17.2 million-$27 million Zymed Medical equip. $500,000-$3.2 million

Profit (Loss) Company Industry Growth MiniScribe Disk drives ($16.8 million)-$25.8 million* Silicon Gen. Semiconductors $153,000-$1.5 million ADAC Labs. Medical systems ($33 million)-$4.3 million Rexon Data storage (5.7 million)-$9.2 million Adobe Systems Software $57,700-$21.1 million Granger Assoc. Telecomm. ($4.4 million)-$9.3 million Margaux Cont. Mgmt. systems ($5.4 million)-$2.4 million Zymed Medical equip. 0-$300,000

* MiniScribe: Because of a massive fraud, dating as far back as 1985, the company says its previously reported financial results are not accurate. MiniScribe says it will release corrected financial results in about six weeks.