AST Is at the Crossroads : Computers: Irvine firm’s reinvention as major PC maker is leadership test for co-founder Safi U. Qureshey.

IRVINE â€”  AST Research Inc. scored a public relations coup last week when Vice President Al Gore, as part of his campaign to promote an overhaul of the federal bureaucracy, told a group of reporters that the Orange County personal computer maker was a model of reinventing.

“We now have AST computers in the White House, and I’ve got one sitting on my desk,� Gore said during a meeting with employees at AST’s Fountain Valley computer plant. “I can’t tell you how impressed I am with this company.�

Safi U. Qureshey seemed relaxed in the spotlight, looking equally as comfortable sitting next to his employees as to Gore. Such poise is one reason that AST’s chief executive--a 42-year-old immigrant from Pakistan--has outlasted most other original CEOs in the personal computer industry.

“From the Three Musketeers to $2 billion in sales, we’ve had to reinvent ourselves many times to get where we are today,� Qureshey told Gore.

During his moment of glory, Qureshey chose to invoke an image from AST’s fairy-tale origins in a garage, of how three immigrant engineers risked all to launch a small company, of how they used the initials of their first names to form the “AST� name, of how they had an egalitarian management style that led to their nickname as the “Three Musketeers.�

Yet, reality and the fairy tale have followed divergent paths. In some ways drastic and others unseen, the Irvine-based company has dramatically transformed itself in the 15 months after a devastating power struggle that led to the forced resignation of co-founder Thomas C.K. Yuen.

“I want to create a company culture not scared of change but accustomed to change,� Qureshey said. “As I look at the leadership, I look at changing myself.�

With the completion of a $105-million acquisition of Tandy Corp.’s computer business this summer, AST Research has become the fourth-largest PC manufacturer in the United States based on 1992 revenue, according to market researcher International Data Corp. in Framingham, Mass.

AST’s 1993 market share growth is projected to be second only to Compaq Computer Corp., estimates IDC analyst Eric Lewis. Two years ago, AST declared it was a “first-tier� manufacturer and not just a maker of inexpensive IBM clones. But many still say AST is in the shadow of the computer industry’s Big Three.

“We put them in the clone nobility; not a no-name brand and not quite a top-tier company with the recognition of Apple, IBM or Compaq,� said John McCarthy, director of technology research at Forrester Research Inc. in Cambridge, Mass. “They’re holding their own in the PC industry blood bath.�

The company’s complete transformation into a recognized major player will be the ultimate leadership test for Qureshey, AST’s only remaining founder. In the early years, Qureshey was viewed as “Mr. Outside,� the personable executive who spoke to the media and to Wall Street to gain attention for the company. He left the engineering, marketing and operations duties to other senior officials.

But the Tandy deal helps establish AST as Qureshey’s company. For $15 million in cash and $90 million in notes, Qureshey has set in motion the company’s next stage of growth, analysts say.

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There is little prologue to this unfolding drama at AST, which had never made a major acquisition before.

The company has plunged into the Tandy purchase with the same instinct it showed in October, 1986, when it moved from being a circuit-board maker to become a computer manufacturer.

AST made add-on boards, electronic circuitry mounted on plastic that can be snapped into a computer. Such boards enhance the power of PCs and were AST’s bread and butter from its founding in Yuen’s garage in July, 1980. Skeptics doubted AST could thrive in the increasingly crowded PC market.

But, in a defining moment, AST showed that it had some of the best talent in the computer industry in “Albert (V. Wong), Safi and Tom,� the founders whose first-name initials gave the company its name.

AST’s first personal computers were a smashing success, which placed a spotlight on the threesome of immigrant engineers as rags-to-riches heroes. They fostered an image of egalitarian management; they had an esprit de corps that earned them a distinct image in the industry.

In 1987, the company formed a management committee to govern the company. The founders still ruled, but it was the beginning of AST’s shift toward corporate management.

Soon enough, the image burst. Wong, the chief technical officer, quit after an argument with Yuen about the launch of a new product in November, 1988. Miscues and poor sales resulted in a layoff of 6% of the staff and a loss of $7.5 million for fiscal year 1989.

AST rebounded. Yuen and Qureshey closed ranks and pushed for innovations in marketing and technology. They distributed multiple brands of computers to different computer retailers and offered “upgradable� computers that used inexpensive modular components, which addressed concerns that PCs would always become obsolete. Such ideas showed AST to be more a pioneer than just a mere clone maker.

Moving fast was crucial. When mass market retailers such as Circuit City stores began to sell computers, AST assembled a small group of its “street fighter� marketers to launch an easy-to-use line of PCs for consumers’ homes. New models were being shipped in as little as three months. Sales by major retailers were 20% of AST’s $1.4 billion in revenue in fiscal 1993.

For years, the industry giants tolerated strategies such as AST’s. However, in the past two years Compaq, Apple and IBM have dropped the hammer on middle-tier manufacturers by cutting their prices as much as 40% a year.

Given the choice between similarly priced machines, consumers and corporate America began choosing brand-name equipment over the clones. The top 10 computer makers will have 64% of the U.S. market share by year’s end, compared to 53% last year, estimates Lewis of International Data Corp.

It was during the latest price war that AST faced its next challenge. The lines of authority between the remaining founders were never really clear, and in April, 1992, Yuen and Qureshey fought over it. Yuen felt he should take control of operations, such as engineering and finance.

The pair asked the outside corporate directors to evaluate their respective leadership. Directors Carmelo J. Santoro and Richard Goeglein sided with Qureshey. At a board meeting in June, 1992, they recommended that the company needed a single leader.

By the end of that short meeting, Yuen quit, Qureshey became chief executive, and Santoro was appointed board chairman, a title formerly shared by Yuen and Qureshey. The players chose to keep it all quiet, but Qureshey later said the split was “like a divorce.�

Will the Tandy deal create another speed bump in AST’s ascendancy?

This time, with larger competitors turning the screws tighter, AST can’t afford to be seen as anything less than a leader and innovator. And this time, Yuen is not around to lend his skills.

“As an individual, I have more at stake. I’m betting the farm on this acquisition,� Qureshey said in a recent interview. “I have my net worth tied to this company.�

Qureshey controls 2.58 million, or 8%, of AST’s 31.5 million shares. At $17.875 a share, the stock is valued at $46 million.

Surely, Qureshey knows that what happened to Yuen could happen to him. Chief executives have been pushed out at IBM, Apple, Compaq and a host of other companies. But Qureshey has outlasted skeptics who have doubted his management skills in the past.

Santoro, an industry veteran who also is chairman of Silicon Systems in Tustin, has a reputation as a board member who displaces founders. But Qureshey, he said, is the rare kind of founding executive who has made the transition from entrepreneur to CEO.

Qureshey’s longevity as a top executive “is embedded in how he handles power,� Santoro said. “The true manager knows you amplify your power by giving it away.�

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Behind the scenes, Qureshey has assembled an experienced team to help lead the new AST. Eight of 14 top executives have come aboard since Yuen left, bringing experience from companies such as IBM, Apple, Tandy and Digital Equipment Corp. In the past, AST likely would not have been able to recruit such high-ranking talent.

Qureshey had a clear strategy that made AST attractive to management candidates, said Richard Ottaviano, senior vice president of administration. He said the company made sure each executive would be able to work with the entire management team.

The string of hires that culminated two months ago with the addition of former Apple Computer executive Jim Forquer, now AST’s senior vice president of operations, “completes a class-A slate,� Santoro said.

“It’s true that AST is a different company today than it was a few years ago,� said Scott Smith, who left Big Blue last year to join AST as vice president for engineering. “With the new people and their diversity of experience, this company is now run by professional managers who were leaders in their former companies.�

Howard Elias, vice president of worldwide marketing and the first to suggest the combination of AST and Tandy, is the highest-ranking executive to come from Tandy. He said he signed on for the chance to “build again.�

Others don’t share such a rosy view of the changes at AST. They see Qureshey allies replacing Yuen allies. Some veteran executives, who requested anonymity, say that AST has become a place where vice presidents war over the size of their offices and too readily embrace buzz words such as “re-engineering� or “right-sizing.� To critics who followed AST’s early years, the company has left behind its soul.

There is no going back, at least for Yuen. Qureshey said that on “these types of decisions, once they are made, it’s better to move on.�

“AST is a different sort of company today,� Yuen said. “I don’t have any interest in going back to AST. Too much work to be done in healing the wounds. It would not be fun.�

Not all the new hires have worked out. One embarrassment was when operations executive Gordon Chilton, who was brought in to direct AST’s manufacturing, resigned in less than six months. Such turnover is dangerous for the fast-moving computer company.

Such a setback, however, is too minor to derail AST from its path, said Eugene Glazer, analyst at Dean Witter Securities, a brokerage in New York. And the strengths gained in the Tandy purchase complement AST well, he said.

With Tandy, the company will benefit from volume discounts on its computer components, Tandy’s computer technology, access to 6,000 Radio Shack stores, and four new factories, including a much-needed one in Europe.

AST added 2,200 people to its 4,000-worker roster with the purchase, but it chose not to hire 500 of Tandy’s workers. Once AST identified which divisions it wanted, it began merging Tandy into AST.

Forquer, the top operations person, says the biggest job will be to integrate Tandy’s factories and its various information systems with those of AST.

Another Apple veteran, Kirby Coryell, who now runs the company’s Fountain Valley manufacturing plant, said that is no small task, considering that AST now makes more computers each quarter than it did in a whole year only three years ago. Factory workers must learn to juggle orders; they often switch from one procedure to another with every model that rolls down the line.

Coryell said AST plans to add the ability to customize its mass manufacturing line so that dealers can order a large number of computers with a variety of pre-installed software.

“Flexible manufacturing is everything now,� he said. “Our product-life cycles are as low as six months, and we have to make a variety of brands.�

For Smith, the engineering chief, other problems loom. AST’s $32-million engineering budget is dwarfed by its rivals: Compaq spends four times as much and IBM spends about $500 million.

Tandy’s strengths in engineering have already become apparent. The combined companies have designed a family of computers known as subnotebooks, which have PC capabilities but are smaller than existing notebook computers. The products are due out in the first quarter of 1994.

And in marketing, Elias must still decide which brands to keep from Tandy and which from AST. With Tandy’s Victor and GRiD brands, AST now has eight different labels.

Perhaps the most difficult job ahead will be to tie all the efforts together to make AST a household name, said Jeffrey Henning, senior analyst at BIS Strategic Decisions, a consultant in Norwell, Mass.

“People aren’t sure what they stand for,� Henning said. “They’re in a gray area.�

Qureshey said he would like to see the AST name stay, a moniker above a group of product line names, sort of like GM, which has its Chevrolet, Buick and Cadillac brands. More important than name recognition, he says, is whether AST keeps producing fundamentally good products.

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Despite all the benefits from Tandy, at least one follower isn’t sure that AST is big enough. Henry Otto, a manager at Brandywine Asset Management in Wilmington, Del., speculated two weeks ago that AST could be the target of a takeover in the future by a bigger player such as Maynard, Mass.-based Digital Equipment Corp.

AST declines comment on such rumors, which Otto said are not based on any inside information. Still, the remarks prompted a general recovery in AST’s lagging stock, boosting it slightly from $15.25 a share on Sept. 20. AST stock closed Friday at $17.875, up 37.5 cents.

Though the Tandy purchase could cause the company to grow from $1.4 billion to $2.3 billion in sales for fiscal 1994 by some analysts estimates, there are trouble signs that show how much of a task the company has ahead of it.

AST’s net margin in the fourth fiscal quarter ended June 30 was 2.1% of sales, down from 7% of sales a year ago. AST has also borrowed money on its bank credit line for the past two quarters. The balance at June 30 was $52 million.

James Reynolds, an analyst at Wedbush Morgan, an investment bank in Los Angeles, stopped following the stock after he concluded that earnings in the whole PC industry would languish because of the price war.

Other analysts are also waiting for AST to reveal its new balance sheet in the wake of acquiring the Tandy assets. Some expressed surprise that AST bought fewer assets than anticipated--resulting in a drop in price from $175 million to $105 million--but that it did not change the amount of its previously announced write-off: $125 million.

“It is too soon to judge whether this deal succeeds or not,� said Jay Vleeschhauer, a PC analyst at investment bank Unterberg Harris in New York. “We’re watching closely what the financial impact and organizational impact will be.�

Qureshey has had many a good laugh about AST’s skeptics over the years, and he shared a joke about the subject with Gore last week. But the Tandy deal is so big that Qureshey will likely bear the responsibility for any failure instead of his delegates, AST watchers say.

At previous companies where AST’s Santoro became chairman, including Torrance-based Ashton Tate, he removed the founders, built the companies and later sold them.

Santoro denies having similar plans at AST and said he and Qureshey have established a track record of working together during the past year.

“I’ve never been a guy who totally controls everything,� Santoro said. “My role is more like a board member than an executive chairman. It is a role I pioneered. We never said that in six months, if the arrangement doesn’t work, we’ll bail out on it. We think longer term.�

Qureshey agrees: “In a public company, we will be judged every three months. But this is a marathon race, not a sprint. We have built a company that can run marathons.�

Company Milestones

AST’s rise has included several rough spots, such as the resignation of two founders and a round of losses and layoffs.

* July, 1980: AST Research Inc. was founded during a series of lunches at a Carl’s Jr. restaurant in Irvine by three immigrant engineers: Pakistani-born Safi U. Qureshey, Thomas C.K. Yuen, and Albert V. Wong of Hong Kong. Pooling their assets, which included $12,000 in cash and $218,000 in office equipment, they set up shop in Yuen’s garage.

* August, 1981: International Business Machines Corp. introduces its first personal computer.

* December, 1981: AST introduces circuit-board kit that boosts memory storage of IBM’s new PC.

* June, 1983: AST’s revenue reaches $12 million.

* December, 1984: AST goes public and raises $19.32 million on Wall Street.

* May, 1985: AST raises $23.8 million in secondary stock offering.

* June, 1985: Sales of circuit boards and other PC-expansion products generate $138.6 million in revenue.

* October, 1986: AST announces its first line of personal computers and begins shifting product mix from expansion boards and data communications equipment to computers.

* June, 1988: Sales reach $412 million.

* November, 1988: Co-founder Wong resigns after an argument with Yuen, shaking company’s harmonious image.

* June, 1989: AST incurs loss of $7.5 million for fiscal 1989. Cost-cutting measures reduce its staff 6%.

* July, 1989: AST becomes first IBM-compatible computer manufacturer (a week behind IBM itself) to announce upgraded computer based on Intel’s high-speed 486 microprocessor.

* December, 1989: Moves into new $30-million headquarters in Irvine Spectrum.

* April, 1990: AST announces it will sell a clone of NEC Corp.’s dominant computer in Japanese market, a first for a U.S. computer company. Revenue reaches $137.2 million with net income of $9.7 million.

* June, 1992: Yuen resigns, leaving Qureshey as only remaining founder. Carmelo Santoro becomes chairman.

* May, 1993: AST introduces computer series designed to accommodate Intel’s Pentium chip.

* July, 1993: AST purchases Tandy’s computer operations for $105 million.

* August, 1993: AST announces plans to build a $16-million production plant in China.

Source: Times reports; Researched by JANICE L. JONES / Los Angeles Times

New Organizational Chart

Since Thomas C.K. Yuen’s departure, and with Safi U. Qureshey the only remaining founder, several vice presidents have come and gone as the company strives to change from an entrepreneurial enterprise to an industry powerhouse. The current executive roster:

Safi U. Qureshey

Title: President/CEO

Background: Before founding AST, Qureshey held engineering positions at Telefile Computer Products, Computer Automation and A.M. International.

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Carmelo Santoro

Title: Chairman

Background: Past president/ CEO of Silicon Systems, where he remains on the board. Also serves on board at Dallas Semiconductor. Previous board memberships include Ashton-Tate, Paradigm Technology and Seagate Technologies.

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James Forquer

Title: Senior vice president, worldwide operations

Background: Former head of international manufacturing and distribution at Apple Computers

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James Schraith

Title: Senior vice president of sales and service

Background: Former head of AST channel sales and services

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Bruce Edwards

Title: Senior vice president of finance and chief financial officer

Background: Joined AST from AMDAX Corp., having begun his business career with the Arthur Anderson & Co., accounting firm.

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Richard Ottaviano

Title: Senior vice president of administra- tion

Background: Former head of human resources for AST, Xerox Corp. and Cipher Data Products

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Dennis Leibel

Title: Vice president, Legal and Treasury Operations & Secretary

Background: Former vice president of tax and financial planning at Smith International.

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Wai Szeto

Title: Vice president, corporate development

Background: Former vice president of AST engineering

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Richard Diamond

Title: Vice president, information services

Background: Former director of management information systems at Verbatim Corp.

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Gerald Devlin

Title: Vice president, sales, Americas

Background: Former general manager of Apple’s western operations

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Scott Smith

Title: Vice president, engineering

Background: Formerly with IBM engineering

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Howard Elias

Title: Vice president, worldwide marketing

Background: Former head of sales and marketing at Tandy’s PC division

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Katherine Curtin Young

Title: Vice president, supply management

Background: Former vice president of corporate materials at Conner Peripherals. Also at IBM for 29 years.

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Don Leighton

Title: Vice president, worldwide product services

Background: Former vice president of Digital’s Equipment Corp.’s U.S. operations and general manager of product services

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Stephen Stoecker

Title: Vice president, worldwide quality and process improvement

Background: Symbol Technologies, Cipher Data Products and Storage Technology Corp. quality and productivity operations.

Sources: AST Research Inc., Times reports; Researched by JANICE L. JONES / Los Angeles Times

AST on the Fast Track

AST Research, Orange County’s largest computer manufacturer, in just 13 years has broken into the ranks of the top 10 companies in terms of units shipped. It is projected to have the third-fastest growth of the top 10 in 1993. Personal computers shipped worldwide, in thousands:

Company 1992 1993* % change IBM 3,200 4,320 35% Apple 2,780 3,336 20% Compaq 1,555 2,955 90% Commodore 1,443 1,082 -25% NEC 1,345 1,426 6% Packard Bell 700 910 30% Dell 675 1,181 75% Toshiba 650 764 18% AST 594 921 55% Olivetti 550 605 10%

* Projected

Source: International Data Corp.; Researched by JANICE L. JONES / Los Angeles Times

The Founders: Where Are They Now?

The legendary threesome of immigrant entrepreneurs still reside in Orange County, each pursuing a separate dream.

Albert V. Wong: Left AST in 1988. Founded Amkly Systems, a start-up computer firm a year later, but price wars forced him to close it in 1992.

Safi U. Qureshey: AST president/CEO.

Thomas C.K. Yuen: Left AST in June, 1992. Founded Atlantis Computers Inc., a start-up company based in Irvine.