Corporate Focus

Unisys Faces Some Dire Industry Straits

Computer Giant's Problems Keep Compounding

By Paul B. Carroll
The Wall Street Journal

October 4, 1990

The problems at Unisys Corp. started with a small rise in inventories in the summer of 1988. As the company plugged that leak, a few more appeared, then a few more. Now, leaks appearing all over the place are running ahead of the pumps.

As a result, say analysts and industry executives, the nation's third-largest computer company, maneuvering until recently to challenge International Business Machines Corp. for top billing, seems destined to wallow in a trough from which none of its ilk has ever emerged.

As the Blue Bell, Pa., computer and defense electronics company identified its inventory problem, receivables grew, new products fell behind schedule and European business softened. Meanwhile, the U.S. market deteriorated, inventories soared, debt swelled and costs rose out of all proportion to revenue. Unisys cut its work force by more than 10% last year and took a $230 million charge, but still will post a loss for the first nine months of this year.

Late last week, Unisys omitted its common stock dividend after nearly 100 years of paying one. Then, this Tuesday, Moody's Investors Service Inc. cut its ratings on Unisys debt to below investment-grade, raising fears of a liquidity crunch.

The company's stock, as high as $17.125 as recently as March, has tumbled, closing yesterday at $4, up 12.5 cents, in composite trading on the New York Stock Exchange. That means that the company, with $10 billion of annual sales, carries a market value of roughly $640 million. That is $7 billion lower than the market value just three years ago.

In a market where the financial outlook of the computer supplier worries customers who fear becoming technological orphans, the flood of recent problems will compound Unisys' problems.

Computer historians add that they've seen the Unisys scenario unfold before, and it's hard to see things improving much. Unisys has some excellent technology -- notably in systems for banks and government -- and may do all right in the growing market for systems that use the industry standard Unix operating system.

But other companies have had good technology, too. And there are almost no turnaround stories about computer companies that have cratered the way Unisys now has. "It's hard to come back," says Les Alberthal, chief executive of Electronic Data Systems Corp., which assembles or manages big computer operations for corporations. "You lose that edge from an R&D standpoint and you lose step with the market."

Unisys began as a bold experiment by a bold man, W. Michael Blumenthal. As chief executive of Burroughs Corp. in the mid-1980s, Mr. Blumenthal saw stagnation ahead, so he bought Sperry Corp. for $4.8 billion in 1986. Although Sperry was another also-ran, Mr. Blumenthal argued that together the two could take on the U.S. industry's No. 2 company, Digital Equipment Corp., or even giant IBM.

He talked bravely of doubling Unisys in size to $20 billion a year in sales by the early 1990s. As he cut costs faster than anyone expected and produced impressive earnings in 1987 and 1988, some in the industry believed him.

But former Unisys executives -- and there are many these days -- say Unisys never solved its basic problem, even though it was apparent from day one. To retain all its customers who could only run their software on their Burroughs or Sperry hardware, Unisys needed to keep pressing forward with the technology in those machines. But it couldn't afford to develop two lines of similar products when its competitors only had to pursue one line.

Unisys managed to combine some development organizations and build some common parts for its twin lines. But the major development expense lies in designing the dense, intricate circuitry that gives each machine its personality -- and that expense has never gone away.

Because the product lines never merged, both have been squeezed in the marketplace, mainly by IBM-compatible mainframes. As corporate customers increasingly consolidate their data center operations and link all their computers, they tend to standardize on one type of system, usually IBM-compatible.

International Data Corp., a market researcher, says Unisys' share of the world-wide market for computers costing more than $1 million has declined steadily to 4.7% last year from the combined Burroughs/Sperry share of 8.2% in 1985. IDC says Unisys' share of midrange computers has fallen to 5.3% from 7.1% over the same stretch. Unisys itself acknowledges that while Burroughs and Sperry got 80% of the dollars their customers spent on data processing 10 years ago, Unisys now gets less than 40%.

"Each year, you're seeing one or two big companies trying to migrate away from Unisys to the IBM world," says Ken Pontikes, chairman of Comdisco Inc., a big computer leasing company.

Meanwhile, Unisys has fallen behind on some technology. The most powerful Unisys mainframe currently available processes just 35 mips, or millions of instructions per second, while IBM-compatible machines run as fast as 112 mips. That figure is expected to rise to close to 250 mips next year and 350 mips in 1992.

Unisys has tried to develop a software strategy, unveiled on Monday, that would make all its diverse product lines work well together. But that seems to have led merely to an awkward compromise.

Unisys doesn't want to give up the core business of customers who rely on Unisys operating systems -- and who pay a premium because they can't move their software to a competitor's hardware. But Unisys also wants to play a big part in the growing market for "open" operating systems -- which run on just about anyone's hardware, giving customers the flexibility to run their software on whatever machine they like.

So Unisys winds up betwixt and between. It isn't emphasizing its proprietary operating systems as IBM and Digital Equipment are. But it's also not switching all the way to "open" systems, as NCR Corp. just did.

Reto Braun, a Unisys executive vice president, acknowledges that "we are being very opportunistic and are trying to walk both sides. But I think that's the only solution for Unisys."

Unisys' cost cutting also appears to have fallen short. While it took a painful whack at its employee rolls last year, it still generates far less revenue per employee than its competitors. Each of Unisys' 78,000 employees generates an average $130,000 a year. Even at IBM, an oldline company that is criticized for having too much overhead, employees produce $176,000 apiece.

Securities analysts note that Unisys has had per-share losses in five of its past seven quarters and all three quarters this year, despite a favorable economic climate. As the economy turns down, says Hollis Caswell, who ran Unisys' mainframe business before leaving recently to run Hypres Inc., a small superconductor company, "there are still opportunities. The real question is whether the opportunities can compensate for the changes in their basic business."

For Unisys to shake off such gloomy questions, it must first deal with its extensive debt -- and it is making progress. James Unruh, who succeeded Mr. Blumenthal as chief executive when Mr. Blumenthal retired earlier this year, is wellregarded for his financial expertise and has made the balance sheet his top priority.

"We're on track," Mr. Unruh says. He adds that he will cut more jobs, especially if revenue stagnates.

Unisys must also quickly address concerns about its liquidity. Executives say they haven't gone into the commercial-paper market since January, so lack of access to that market won't hurt. They also say they have $1.25 billion of revolving credit plus ample other credit lines available.

"The characterization that we have a liquidity crisis is not at all right," Mr. Unruh says sternly.

Consultants and former employees agree that Unisys has good technology to help banks tackle their check-processing chores. The company also seems to be off to a good start in image-processing, a potentially enormous area of interest to banks, insurance companies and others who want to treat documents as pictures and not streams of data. Unisys also offers good "transaction-processing" capabilities that benefit banks, airlines and others that constantly need to alter and update huge data bases.

But it's hard to generate enthusiasm among computer customers after they've begun to wonder about a company. At the big software announcement Monday, Mr. Unruh prepared to address the quiet room of 100 people. "Is this mike live?" he asked. Then he paused and added: "Is this audience alive?"

Copyright (c) 1990, Dow Jones & Co., Inc.