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Kingston Buys Into Encryption IP

Kingston Technology Inc., the world’s top seller of consumer USB drives, has moved to strengthen its position in the commercial market with its first technology buy.

The Fountain Valley-based company acquired the IronKey brand of encrypted USB flash drives and external USB hard drives from Imation Corp. in Minnesota for $4.2 million, according to filings with the Securities and Exchange Commission.

Kingston has invested in component suppliers over its nearly 30 years in business, but those stakes did not bring the sort of underlying technology that leads to product enhancements or design changes.

The deal for IronKey adds intellectual property, accounts and inventory—such as Windows to Go USB flash drives geared for enterprise applications—in one of the company’s fastest growing segments as business customers aim to secure sensitive data when it comes to employee access.

“Most customers look at IronKey as the premium,” said Kingston Flash Memory Business Manager Andrew Ewing. “The USB business has been pretty stable over the last few years. The one area where it’s still growing is encrypted, secure USBs.”

Kingston is one of the largest privately held companies in OC and the largest minority-owned business here, with an estimated $6.5 billion in sales last year.

Encrypted USBs for corporate customers account for a small percentage of Kingston’s revenue but bring in coveted margins in a highly commoditized industry. The segment grew at a 35% clip in 2014 and posted another double-digit jump last year.

“It’s actually a good profit margin product for us,” he said.

Consumer USBs, according to Ewing, carry single-digit margins through direct sales and even less through big box and online retailers. Encrypted USBs, by comparison, bring in three to four times that.

Kingston plans to maintain the IronKey brand, which carries the highest level of encrypted certification of its products, known as Federal Information Processing Standards 140-2 Level 3. FIPS 140-2, developed by the National Institute of Standards, is the cryptography standard required by the U.S. government for protection of sensitive data.

That means any product with cryptography used by civilian, military and other federal agencies must comply with FIPS 140-2. The Level 3 designation stipulates that devices, such as USBs, must have their internal components, including controllers, crypto chips and flash memory, encased in epoxy so any attempt to physically break into the device prompts deactivation.

Kingston’s DataTraveler line of products, which are the top-selling encrypted USBs in the consumer market, will maintain the Kingston brand, according to Ewing.

The company, founded in 1987 by John Tu and David Sun, became the world’s largest memory products maker for computers and consumer electronics by melding quality and affordable prices with a finely tuned supply chain primarily driven by production in Taiwan.

The Business Journal has uncovered at least four investments Kingston has made in Taiwanese manufacturers in the last several years.

The company about two years ago bought 5 million shares of Phison Electronics Corp. for nearly $31 million in a private placement that more than doubled its 1.5% stake in the chipmaker, according to a filing with the Taiwan Stock Exchange.

Kingston in 2013 paid about $200 million to acquire some assets of Powerchip Technology Corp. and then signed a separate deal to pay the company about $380 million over two years for foundry services. Kingston already had a minority stake in Powerchip, having paid about $60 million for shares in 2009.

It acquired a 21% stake in Panram International Corp. in 2012 for $4.9 million, becoming its largest shareholder. That followed the company’s purchase of about 274 million shares of Rexchip Electronics Corp. from Powertech Technology Corp. for an estimated $128 million.

Media reports have identified Kingston as Rexchip’s largest shareholder.

The deals underscore the company’s investment strategy and business model of shoring up key memory-components suppliers in an ever-changing pricing environment that rides wild swings in supply and demand across the globe.

The moves also provide Kingston with custom chip and storage configurations for smartphone and tablet makers.

Domestic Production

The company will rely on IronKey’s Montreal-based contract manufacturer Memory Experts International—which has its factory in Santa Ana—for the rest of the year as it updates newly acquired technologies with its own proprietary features.

Kingston plans to maintain the production of corporate encrypted USB drives in Orange County on a contract manufacturing basis in Santa Ana or at its plant in Fountain Valley.

Orders of encrypted USBs for corporate customers typically range from 50 to 100 units, although the Fountain Valley plant can handle much more.

Fountain Valley is the only Kingston plant to assemble that type of drive, as the government, law, healthcare and finance sectors, among others, prefer domestic production when it comes to sensitive data storage.

“They like the fact it’s assembled in the U.S.,” Ewing said.

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