Warner Sells Atari to Tramiel

By David E. Sanger
The New York Times

July 3, 1984

Warner Communications Inc., giving up its 18-month effort to rebuild a business that once flourished with Pac-Man video games and the boom in home computers, yesterday sold nearly all of its troubled Atari unit.

As a result of the sale and writedowns, Warner said it would report a second-quarter loss of $425 million.

Atari was sold to a new company headed by Jack Tramiel, a longtime participant in the home computer business. Analysts said the sale promised a new round of competition in the industry. It was Mr. Tramiel, the aggressive, cost-cutting former chief executive of Commodore International Ltd., who led the price-cutting war that buried Atari last year, many industry experts said.

Three Others Driven Out

Three other major competitors - Texas Instruments Inc., Mattel Inc. and the Timex Corporation - have been driven out of the business since October.

Under an agreement signed at 4 A.M. in New York yesterday, Warner will receive no cash for the company, but $240 million in long-term notes and warrants for a 32 percent interest in Mr. Tramiel's new venture. Mr. Tramiel, in return, will receive warrants giving him the right to purchase one million shares of Warner common stock at $22 a share. Warner is retaining two parts of Atari, which make up about 20 percent of the company: the coin-operated games division and Ataritel, the division working on telecommunications.

'Gave Away the Company'

''Warner essentially gave away the company, in hopes Tramiel could make something happen,'' said Lee Isgur, an analyst with Paine Webber Inc., echoing comments by others on Wall Street who follow Warner.

By midday yesterday, within hours of the completion of the deal, Mr. Tramiel, his son Sam, and more than 20 of his aides were reportedly already installed in the president's suite at Atari's Sunnyvale, Calif., headquarters. Warner said that the previous occupant of that office, James J. Morgan, a 42-year-old marketing executive who was lured from a high-level and promising job at Philip Morris Inc., last year to turn Atari around, would be ''taking a leave of several months.''

''Jim was completely blindsided on this,'' a senior executive of Atari, who asked not to be identified, said in an interview yesterday. ''I don't think he even knew about it the sale until Thursday, when it was too late for him to do anything about it.''

Mr. Morgan, Mr. Tramiel, and Steven J. Ross, Warner's chairman, did not return telephone calls yesterday. But through a spokesman, Mr. Morgan and Warner officials said in statements yesterday that he was brought into the negotiations ''at the appropriate time,'' but refused to specify when.

Warner said yesterday that Mr. Tramiel and his partners, who were not identified, had agreed to invest $75 million in the new Atari Corporation. Both Atari insiders and sources close to Mr. Tramiel said yesterday that they expected him to revamp the company, replacing virtually all of its top officials and preparing the company to compete with Commodore, which he founded 25 years ago as an office typewriter business.

Others said he would change Atari's focus to concentrate on complete office systems selling for under $1,000. That would put him in direct competition with Apple Computer Inc. and the International Business Machines Corporation, both of which are moving into the low end of the personal computer business.

Rumors about the possible sale of Atari have circulated for months. By the time the company was reduced to about 1,100 employees last month - down from more than 7,000 a year ago - it seemed likely that Philips, the European electronics giant, would buy either a portion or all of the company.

But yesterday's announcement still came as a surprise to many, and executives scurried throughout the day to line up new jobs.

A Tumultuous Eight Years

For Warner, the sale marked the end of a tulmultuous eight years in consumer electronics that began with tremendous promise. Atari was purchased in 1976 from Nolan Bushnell, its founder and a participant in several other high-technology ventures. By 1981, Atari's entire product line was a phenomenon, and profits of more than $300 million were garnered in 1982.

The company grew quickly and analysts said that Warner expanded with it, hoping to use its booming video game business to pump more money into its film, record and consumer goods divisions. A loosely knit group of Congressmen who pointed to Atari as a symbol of how the economy should be redirected toward high- technology production were even labeled ''Atari Democrats.''

But beginning in the last quarter of 1982, everything began to unravel. Demand for video game products dried up, and retailers were left with huge inventories of unsold equipment and game cartridges. By last summer, the situation worsened, as Commodore's efforts to grab a major market share forced Atari to cut prices on its home computers far more deeply than it could afford, analysts said.

On July 8, Raymond E. Kassar, who had led Atari through its period of breakneck growth and the subsequent collapse, was forced out of the company. He was replaced by Mr. Morgan, a trim, sharp-tongued executive whose marketing success at Philip Morris appeared to put him in the running for the leadership of the cigarette company.

In January, describing his first few months at Atari, Mr. Morgan said that management had become overgrown, products were designed before they were focused for specific markets and were canceled without explanation. ''This company is going to start delivering what it says it will deliver,'' he said. ''Up to now, we have not done that. We have been erratic, unbelievable, and we have said things we didn't mean. That has to come to an end.''

Failed to Cut Costs

But even among Mr. Morgan's admirers within Atari, there was criticism yesterday that he failed at his primary task: to cut the company's manufacturing and development costs quickly enough to stem losses that last year totaled $538 million.

But some analysts and company insiders noted yesterday that even heroic efforts by Mr. Morgan might not have been enough. Demand for home computers has declined far below the levels expected six months ago, and Commodore has continued to widen its share of the market for inexpensive computers.

Analysts said that they thought Mr. Tramiel had made an advantageous deal. ''He's not really paying for it, and I guess if it doesn't work out he can walk away from it,'' said David Lawrence, an analyst for Montgomery Securities in San Francisco. ''It's clear that the old Atari was dead. It just wasn't worth anything.''