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Valuable Patent Puts Computer Automation in Spotlight Again

September 06, 1987|Carla Lazzareschi

Sure, Computer Automation Inc. has disappointed enthusiastic investors in the past. But the editors of California Technology Stock Letter say that's no reason to pass up another chance to make money on the Irvine electronics company.

In fact, investors who followed newsletter editor Mike Murphy's repeated "buy" recommendations on Computer Automation over the last 10 months already have done fairly well.

Murphy, who adopted the small computer test-equipment maker after big name Wall Street types abandoned it in the early 1980s, issued his first buy call last November when the stock was trading at about $3.50 a share, believing that it would reach at least $6 and possibly as much as $9 a share within the year.

Well, Computer Automation closed Friday at $13.25 a share, and Murphy is even more enthusiastic about the company's future trading prospects. He sets out a scenario that has the shares rising to between $20 and $25 within the next year and argues that Computer Automation may be an attractive acquisition candidate for the right competition-minded personal computer maker.

According to Murphy, who says he has verified the information "from several sources," Computer Automation stands to rake in thousands of dollars in licensing fees over the next several months as a beneficiary of the intense fight among personal computer clone makers to copy the new line of IBM Personal System/2 machines.

Here's his story.

In 1973, four Computer Automation engineers registered U.S. Patent No. 4025903, otherwise known as "Automatic Modular Memory Address Allocation System"--a blueprint for allowing parts of computers to talk to each other automatically. Several years later, IBM engineers uncovered similar technology while developing the company's just-released new line of personal computers and their much-ballyhooed "micro channel" processing power.

However, because of the 1973 patent, IBM was forced to license Computer Automation's technology, and a deal was struck earlier this year for about $100,000 plus unspecified royalties. The IBM deal was good enough news, but even better, Murphy claims, is the fact that would-be copiers of the new IBM machines must also license the Computer Automation technology if they hope to turn out duplicates of the PS/2.

Already, Murphy says, Compaq and AST Research Inc. are negotiating with the company for a licensing agreement. Computer Automation officials declined to comment on the matter, but Murphy says he has confirmed the discussions.

Furthermore, Murphy says he believes that at least 300 additional companies--maybe as many as 500--will have to seek licensing agreements with Computer Automation if they hope to cash in on the potential to copy the PS/2. "It's great news for Computer Automation," Murphy says.

Murphy says the licensing revenue bonanza will be enough to drive Computer Automation up to the $25-a-share range as soon as the next major signing is announced and the rest of the investment community catches on. Such a stock price would put the company's value at about $50 million, a level Murphy considers a relative bargain by most high-tech standards.

So, he wonders if perhaps the patent isn't valuable enough to prompt some aggressive clone maker, "maybe Compaq," to acquire Computer Automation to keep other clone makers from gaining access to the micro-channel technology. "I have no idea that anyone would want to buy them; it's just a thought I had," he confesses. "But it makes sense to me."

A word of caution, however, from the history books.

In the early 1980s, when the company's minicomputers boasted state-of-the art technology, the horizon seemed pretty rosy and Computer Automation stock ran up to $44 a share. A string of business miscues and the general economic downturn in 1984 combined to generate losses totaling $25 million over four years.

By 1985, the company was seriously considering filing for bankruptcy reorganization and its shares had dropped to an all-time low of $1.375.

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