Burroughs's struggle as no. 2

By Leslie Wayne
The New York Times

December 5, 1985,

Detroit -- W. Michael Blumenthal, chief executive of the Burroughs Corporation and former Secretary of the Treasury, is in the unenviable position of heading a $5 billion company that is considered small by its industry's standards. Burroughs is the nation's No. 2 manufacturer of mainframe computers. But its main competition is the International Business Machines Corporation, nearly 10 times its size.

''In any other field, Burroughs would be considered a Leviathan,'' Mr. Blumenthal said. ''But in mainframes, we're a rabbit to an elephant. And, in that situation, you have to be fleet of foot.''

Burroughs, however, has stumbled of late. Its mainframe sales have been sluggish in one of the computer industry's worst years. Its hopes to double in size by merging with the Sperry Corporation were dashed when Sperry rebuffed Burroughs's overtures. And Burroughs's surprise announcement in October of a substantial drop in third-quarter earnings sent shock waves through Wall Street and caused its stock to plummet.

'Our Mainframes Are Better'

Mr. Blumenthal, however, is setting some lofty targets for the company. He predicts a near-term growth in sales of 13 percent to 15 percent and says the company will more than hold its own against I.B.M. and other competitors. ''The reason I think we will succeed is simple,'' he said in his office overlooking two Detroit landmarks, the General Motors Building and the Fisher Building. ''We think our mainframes are better than I.B.M.'s.''

Analysts consider the goals extremely ambitious, given the slow growth of the mainframe business and the increased tendency of corporations to take the ''safe'' route and buy from I.B.M. But Burroughs executives argue that much of the work has already been put in place. This includes heavy emphasis on specific market niches - primarily computers for financial services and health care - and its development of new markets overseas.

''We've got a lot of mileage in our product line,'' said Paul G. Stern, Burroughs's president, who was lured from I.B.M. by Mr. Blumenthal.

Some analysts agree. ''Blumenthal spent two years figuring out what to do and another two doing it,'' said Peter Labe, an analyst with Drexel Burnham Lambert Inc. ''Now the company is at the point where it should get the reward.''

A Tightened Budget

As added insurance, the company is putting the finishing touches on a 1986 budget that calls for a continued squeeze on expenses and more plant closings to help carry it through another possibly tough year, if corporations continue to hold down computer expenditures. And Burroughs continues to seek acquisitions, preferably one large company rather than many small ones.

But perhaps the single biggest determinant in its fortunes in coming months is what happens with its problem-ridden Memorex subsidiary. Purchased in 1981 for about $100 million, Memorex, which makes disk drives - devices that store computer data - is caught in a competitive price war between I.B.M. and the Japanese. The disks' design, which is at the core of Burroughs's new thrust to provide systems, instead of single machines, is so sophisticated that the units have suffered many technological problems.

Some critics contend that Memorex should be sold. Mr. Blumenthal, however, insists that the problems are now cured and that profitability should return next year. He argues that Memorex provides Burroughs with ''an important technology'' and says he plans to stay the course.

But he is not entirely inflexible. ''If we came to the conclusion that there was no way we could make money, we'd look for a better conclusion,'' he said. ''But we haven't reached that point yet and we intend to stay with Memorex as it is.''

Growth Called Vital

Burroughs's ability to grow is critical, since it must grow to survive. ''In this business, when you stop growing, your competitive posture tends to deteriorate,'' said David C. Moschella, an analyst with the International Data Corporation, a computer consulting firm in Framingham, Mass.

Mr. Blumenthal understands that well. A former Princeton economics professor, he came to Burroughs five years ago from the Carter Cabinet, where his fiscally conservative views clashed with Mr. Carter's and eventually led to his departure. Since then, he has helped mastermind the turnaround of a 100-year-old company that had come perilously close to skidding into the No. 3 position - and possibly further - in the mainframe business.

It was an unusual challenge for the 59-year-old Mr. Blumenthal, who had no previous experience in computers, and it was yet another twist in a life filled with many unexpected turns. He came to the United States in 1947 as a refugee whose family had escaped Nazi Germany by emigrating to China. A professorial man who keeps a Dunhill cigar perpetually lit, Mr. Blumenthal's career has spanned three areas - academia, government and business.

Although he appears to relish discussion of business matters, he digresses easily to public policy issues, ranging from the condition of Detroit to the South African economy. Before becoming Treasury Secretary, Mr. Blumenthal had been chief executive of the Bendix Corporation and is credited with bringing that Detroit company to new levels of profitability.

Blumenthal's Shake-Up

Under Mr. Blumenthal's leadership, Burroughs was shaken from top to bottom. New mangers were brought in, largely from I.B.M., and many top executives were given early retirement. Some 25 plants were closed worldwide, including eight this year, and employment was trimmed by 4,000.

Spending to improve the service organization and upgrade sales force training was increased to more than $67 million from less than $10 million in 1981. And Burroughs's lackluster product line was given new life with competitive new entries, most recently the highly acclaimed ''A'' series of mainframes, which came to market to compete with I.B.M.'s new Sierra mainframes, officially known as the 3090 series.

Burroughs also broadened its product line into such areas as intelligent office work stations by entering into joint ventures with specialized computer makers to give the company products at the low end of the market, where I.B.M. is less competitive. In doing so, Mr. Blumenthal bucked a Burroughs tradition of manufacturing all its products internally.

And the company has dropped unsuccessful products, such as calculators and superscientific computers, and set goals for several niches where it felt it could compete with a broad line of specialized products - primarily in financial services, health care and government services.

The Numbers Improve

Much of this has already paid off. Mr. Blumenthal proudly notes that the company's return on equity rose to 10.8 percent last year from 3.9 percent when he arrived. Revenue per employee has climbed nearly 50 percent, to $74,000, while pretax profit margins have risen to 7.4 percent from 4.6 percent over the same period.

And earnings had also climbed smartly until the third quarter this year, when they fell to 71 cents a share from the previous quarter's $1.11. This was attributed to a general industrywide slowdown in all computer sales as well as to losses in Memorex.

This year has been particularly bad for all mainframe makers as corporate customers have cut back on capital spending in the face of uncertainty over the Federal budget deficit and the direction of the economy. Burroughs's executives expect this trend to continue into next year.

Some say that Burroughs could gain more customers by making its products more compatible with I.B.M.'s, but the company rejects this notion. Burroughs's mainframes -room-sized computers that cost from $100,000 to $8 million - can communicate with I.B.M. computers, but are not plug-compatible. This means the two systems can exchange data, which is important for customers who buy from more than one computer supplier, but Burroughs machines cannot run I.B.M. software.

''If they moved it closer to compatibility with I.B.M., at least Burroughs could sell into a broader market,'' said Thomas Crotty, an analyst with the Gartner Group, based in Stamford, Conn.

But Mr. Blumenthal counters: ''Once you are plug-compatible, you are totally dependent on every move I.B.M. makes. It's no accident that we are not plug-compatable and we do the volume that we do.''

'Coexistence' Sought

In fact, because I.B.M. is so dominant, Mr. Blumenthal holds no illusions about taking it on, speaking instead of ''coexistence.'' While Burroughs hopes to lure some I.B.M. customers in the fields where it is concentrating its efforts, a large part of the game plan is simply to win customers from its smaller rivals.

''This is such a huge market, even what's left after I.B.M. is still large,'' Mr. Blumenthal said.

GRAPHIC: photo of W. Michael Blumenthal (NYT/Jack Manning); graphs of Burroughs revenues and net income