Link Technologies, a small firm located in San Jose, California, is currently engaged in the development, manufacture, and sale of high-speed fax modems for use in personal computers. The company was created in 1980 by Mr. James Lee, a researcher who was employed at IBM’s T.J. Watson research center, and two former graduate school classmates from Cornell University.
At the time, the personal computer business was in its infancy, and the company sought to fill a niche by providing communication networks to link mainframe computers. Although the company grew rapidly, Mr. Lee felt that the real opportunities for growth lay in personal computers. In the mid-1980s, he decided to make a major switch to the production of high-speed modems. Link Technologies’ new products were extraordinarily well received in the marketplace.
Many viewed the company’s culture as an essential element in its rapid growth. Mr. Lee emphasized the need for high quality and technological superiority. To ensure that his company was on the cutting edge, he provided strong financial incentives for production managers to develop new or more-efficient products. Further, he contained costs by decentralization, requiring that each branch of the firm operate as an independent profit center. As a result, Link Technologies was rated by a prominent business periodical as one of the 10 best-managed small firms in the United States.
Mr. Lee and his team had developed a new method transmitting data reliably at high speed, and this technological breakthrough, together with the proprietary communications software that came bundled with the product, led to strong demand for the company’s main product, the PCI 2000 modem. Indeed, the company’s modems were recognized to be of the highest quality, comparable with the products of much larger competitors such as Intel, Motorola, and U.S. Robotics. The company was especially successful in marketing its products abroad because the proprietary communications software included with each modem was extremely easy to use. Further, the company ensured that detailed manuals were provided in the local language, a strategy that paid off handsomely in some countries, such as Finland and Turkey. Indeed, by 1994, almost two-thirds of the company’s revenues came from sales abroad. Exhibit II 6.1 provides details of the company’s revenues in domestic and foreign markets from 1990 to 1994.
The rapid expansion into foreign markets presented a new problem for Mr. Lee, who was both the chief executive officer and the largest shareholder in the firm. The initial capital for the company came from the savings of the three founders and a substantial investment from a silent partner. Before going public in 1989, the company had sought to conserve cash by compensating key employees partially with shares in the fledgling enterprise. The rapid expansion in production facilities was financed primarily through intermediate-term loans. However, the company eventually had to sell new common stock to the public to raise the necessary capita. Even so, Mr. Lee himself still retained almost 32% of the outstanding shares, and this represented almost all of his personal wealth. Other founders and their families also had substantial holdings. Mr. Lee, although well aware of the potential benefits of diversification, was unwilling to reduce his holdings in the company. He still felt extremely confident about the company’s future prospects and its ability to create new products, and he enjoyed the status and benefits associated with controlling the firm. But Mr. Lee was concerned about the risks to his personal wealth arising from foreign currency fluctuations. In some countries, especially some of the smaller nations where Link Technologies had high market share, currency fluctuations could be quite severe, and in one case had had a substantial impact on profits.
In November 1990, Mr. Lee asked the firm’s chief financial officer,...
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