Imation tries to evolve into data-storage survivor

Almost 20 years ago, 3M spun off a bunch of low-margin businesses that became Imation. But the new company struggled to find its footing, and its products — like recording tape, photo film and floppy disks, among others — became dinosaurs.

Now the company is in especially dire straits, and once again trying to right itself.

Imation is on track to lose money for the ninth year in a row. And sales are on track for a 50 percent drop over three years. An even steeper sales slide is in the cards, as Imation exits businesses that have little or no prospect for profit.

"There's been a series of decisions that have not turned out to be best for the firm," said Mark Miller, who worked in the operations 3M spun off. He went on to follow Imation as a stock analyst until March 2014.

Miller said Imation inherited optical disc and magnetic tape businesses that would suffer steep declines as new data storage technologies came to market.

"They were No. 1 in the world in terms of floppy disks, optical discs," he said. "They've had a number of twists and turns, and the world has been changing and they didn't keep up with it."

Imation even doubled down on trailing-edge data storage technology. In 2006, the company bought Memorex, which was a leader in recordable CDs and DVDs. A year later, Imation acquired a similar portfolio of products from TDK. The total price tag: $630 million.

"They bet hundreds of millions of dollars on acquisitions that just didn't quite pan out," said Eric Martinuzzi, an analyst with Lake Street Capital Markets. "They were expanding their footprint in a declining industry."

Those acquisitions marked a turning point for Imation. The company's share price has plummeted nearly 98 percent since peaking the year of the Memorex deal.

Last May, the Clinton Group hedge fund persuaded shareholders to oust Imation's CEO and two other board members and replace them with Clinton's nominees.

In a recent conference call with analysts, interim CEO Robert Fernander promised improvement but asked for patience. "We're confident we are on the right path towards creating a stronger and more competitive enterprise that is well-positioned to deliver long-term profitable growth," he said.

Investors show no signs they share Fernander's confidence. Imation's stock has dropped more than 70 percent since the board election last May.

But the hedge fund has really shaken things up, dumping business lines and employees. Analyst Eric Martinuzzi said he's never seen such widespread upheaval.

"There's been substantial headcount reduction," he said. "The general counsel, the chief financial officer, the CEO is gone."

Even though the changes are drastic, Martinuzzi said they may be justified given the company's previous management.

"I would characterize the prior strategy as mistaking activity for accomplishment," he said. "Just because you're doing a lot of revenue, if that revenue is not profitable, then you probably shouldn't be doing it."

Still, Martinuzzi said, it's unclear whether the Clinton Group can do better by narrowing Imation's focus to industrial-scale data storage and security products for businesses and government. "There will be another chapter," he said. "It just remains to be seen if it's a profitable one."

The track records of activist investors like Clinton Group vary. Sometimes they push changes that make companies better, and sometimes not.

"On average, shareholder activism or hedge fund activism is good for the target firm," said Columbia University finance professor Wei Jiang, who co-authored a study of the long-term impact of hedge funds on the companies they target.

But activists typically target companies in solid underlying businesses that are struggling — not firms that are as beaten up as Imation. The company even sold its own headquarters campus, turning it over to Slumberland.