Smaller Companies: Radstone will have to fight to defend its high-tech niche

THE film The Hunt for Red October was a missed public relations opportunity for Radstone Technology, says Charles Paterson, the company's managing director. As he watched, he realised that it featured the US Navy's LA class attack submarines, newly refitted with Radstone components.

Radstone was formed in 1988 by a management buyout from Plessey. It manufactures computer subsystems that can be used in a wide range of capital equipment, from warships and missiles to medical scanners and steel mills. The components can withstand extreme conditions such as vibration or heat, making military uses possible.

Radstone is about to come to the stock market through a placing of 60 per cent of its equity. Pricing details will be announced tomorrow, but Radstone is likely to be valued at pounds 18m-20m. The net pounds 3m being raised will be used to pay off debt.

Radstone's computers have two distinguishing features. First, they are open systems products and conform to international standards, so they are compatible with any other bits of equipment. This is a must for all new computer products. But Radstone is still slightly ahead of the game, having a 1987 patent (which it does not enforce) for the military open systems standard.

Second, Radstone is already developing computer systems using reduced instruction set chip (RISC) processors, which operate much faster than traditional computer chips. And speed is crucial for, say, a missile launcher reacting to incoming fire. Radstone is refitting Patriot missile launchers for Raytheon in the US.

The company spends about 8 per cent of turnover a year on research and development. The equivalent of another 2 per cent of turnover is funded by partners. Radstone's gross margins have improved dramatically, with operating profits of pounds 311,000 on turnover of pounds 20m in 1991, but pounds 1.2m on turnover of pounds 26m in 1993.

Radstone's specialism in military components has helped it despite pressure on defence budgets. Its standardised open systems come far cheaper than anything the military can design and build itself.

Radstone reckons the opportunities will grow. The idea of offering the military something it does not have to pay to develop is still new, but procurement budgets no longer justify expensive bespoke electronics.

Radstone's biggest competitor for defence contracts is usually the in-house team. Military red tape forms a minefield keeping other independent competitors out.

In civilian applications of its technology, which account for 30 per cent of turnover, there are hundreds of competitors. Motorola is the biggest. Radstone tries to sell what Motorola does not, but industrial sales have been flat during the recession and the company says there are still no signs of improvement.

There are good reasons for caution. A third of Radstone's business is suffering, the other two- thirds is in defence. The company exports most of its output, and so is vulnerable to currency changes. Finally, it must woo the City at a time when technology stock is going out of fashion with investors.

Radstone has a technical lead and a well-defined niche - but it will need to defend them.