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TECHNOLOGY – Microsoft Takes Big Interest in Small Player

Orange County Business Journal

Tom Yuen’s SRS Labs Inc. might be a bit player in the market for Internet-based multimedia, but it’s getting a boost from one of the biggest names in the business.

The inconspicuous Santa Ana maker of sound-processing technology took on a higher profile earlier this month with an equity investment from Microsoft Corp. and a licensing agreement that will enlist SRS’s technology in some of the software giant’s most contested battlegrounds.

The news sent SRS stock soaring: It opened March 10 at $39 a share, nearly twice its March 9 close, and reached $47 before closing at 33.63. Volume was 24 times normal.

Although neither Microsoft nor SRS officials would disclose terms of the investment, it is believed to be in the $5 million range. The deal comes on the heels of a restructuring by SRS Chief Executive Yuen that would create three new divisions in an attempt to speed up his company’s return to profitability. In its most recent financial statement, SRS posted its first significant earnings in a year, $300,000, on sales of $10 million.

The new business units will add a more visible consumer element and presumably, more revenue to the existing business of supplying original equipment manufacturers with components to boost sound quality in brand-name consumer electronics products, such as stereo receivers and Walkman tape players.

Yuen said he’s confident the developments are the first step in pushing the company out of “no man’s land” and penetrating new segments, while luring more customers in existing markets.

Best known as a co-founder of AST Computers, Yuen helped finance SRS in 1993 and took over its day-to-day operations last year in the midst of languishing financial performance and the departure of several key executives. Its stock had been in a $2.50-to-$5-per-share range until it began climbing last December. It reached the $20 level before this month’s announcement.

Yuen owns 26 percent of the company.

Under the restructuring, SRS Labs will become a holding company with multiple subsidiaries. In addition to its existing SRSWOWcast.com (Internet broadcasting) and Valence (a Hong-Kong-based outsourced chip designer) units, the restructured company will have several new products groups: one that designs SRS-branded devices to enhance sound for everything from video games to VCRs; a voice-technology company working on speech-recognition devices and technology that makes transmitted voices more intelligible; and an Asian version of its SRSWOWcast venture. Each was launched with less than $1 million, Yuen said.

Yuen hinted that his strategy might require acquisitions of other companies or their technologies, but he wouldn’t say whether any deals are in the works. The Valence subsidiary is already on track to go public in the third quarter, and Yuen said he’s planning the same for the other units.

The moves are designed to augment the company’s licensing fees from stereo and home theater equipment makers with a line of SRS-branded merchandise and Internet content.

“This is a significant opportunity a bigger one, I have to say, than AST was,” Yuen said. “AST was a Cinderella story; this is another one in the making.”

AST Research had grown from a three-man garage operation in 1980 into one of the largest PC manufacturers in the world before drowning in a flood of new competitors and low-cost PCs that obliterated margins for just about everyone in the industry in the last half of the ’90s.

“PC manufacturing these days is no more than assembling a jigsaw puzzle,” Yuen said, pointing out the degree to which the market has become a commodity business.

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