Burroughs Proposes to Buy Sperry, Create New No. 2 Computer Maker

Planned Bid of $70 a Share, Or $4.06 Billion, Tops Offer Made Last June

This article was prepared by Dale D. Buss in Detroit, And Daniel Hertzberg and John Marcom Jr. in New York
The Wall Street Journal

May 6, 1986

Burroughs Corp. proposed a $4.06 billion acquisition of Sperry Corp. designed to create a strong No. 2 computer maker to compete with industry leader International Business Machines Corp.

Detroit-based Burroughs almost a year ago proposed to combine the two computer companies in a stock swap, but the market's negative response helped sink that proposal. Burroughs's new offer of $70 a share in cash and securities is significantly more attractive. In sharp contrast to last year, Sperry's stock surged on the news.

Managers of New York-based Sperry have voiced determination to maintain their independence, but analysts and arbitragers said the latest offer is likely to prove hard for Sperry to resist. Wall Street sources said the Burroughs offer was a "bear hug" -- a purportedly friendly approach to a target company that carries the implied threat that the offer could turn hostile. "The implication is quite clear that if discussions don't get going in a few days, a (hostile) tender offer will be launched," one source said.

A spokesman for Sperry declined to comment.

In a letter delivered yesterday to Sperry management, Burroughs proposed to acquire Sperry's approximately 58 million outstanding shares for $70 a share, 55% of that in cash and the remainder in Burroughs debt securities and preferred stock.

The Burroughs offer apparently caught Sperry management and most stock traders by surprise. Investors reacted enthusiastically. The offer was announced after the close of New York Stock Exchange trading, but Sperry common soared to $67.50 a share, up $12.50, in so-called third-market trading off the Big Board by Jefferies & Co., Los Angeles. Burroughs common closed at $60, down 12.5 cents, in Big Board composite trading.

One arbitrager called the offer "a hell of a price," noting that Sperry stock has barely budged in the past year despite a big stock market rally.

Sperry has long been a takeover candidate, first discussing a merger with ITT Corp. last year before the Burroughs offer. Despite stronger financial performance in recent years and an attractive defense electronics business, Sperry has watched its computer market share shrink slowly for years and faces long-term questions about its ability to compete against a far larger IBM.

W. Michael Blumenthal, Burroughs's chairman and chief executive officer, said in an interview that a merger with Sperry would "introduce into the marketplace a new element of strength and competition. It's a tremendous opportunity to build a second strong competitor" in the industry to IBM. The merged company, with annual revenue of more than $10 billion this year, would unseat Digital Equipment Corp. as the world's second-largest computer maker -- but would still only hold about 12% of the large computer market against IBM's more than 60% share.

Mr. Blumenthal asserted that a merger would "remove the fear factor" from computer buyers' evaluations of Burroughs's and Sperry's future prospects in the face of IBM's market dominance. But, at least for a year or two after the merger, Burroughs would be saddled with a heavy debt load compared with cash-rich competitors.

Nevertheless, Mr. Blumenthal said he's convinced Sperry executives will "see the industrial logic" of a combination, and emphasized that a merged company wouldn't try to combine Burroughs's and Sperry's incompatible mainframe computer designs, but rather sell and service them separately.

That emphasis apparently is aimed at Joseph J. Kroger, Sperry's president and chief operating officer and to date an ardent advocate of the company's independence. One source characterized the issue of the two different computer designs as a "Kroger smoke screen," which was used to sow doubts about the wisdom of a merger last year.

In a letter delivered to Gerald G. Probst, Sperry's chairman and chief executive officer, at 4 p.m. yesterday, Burroughs asked that its offer be given "prompt attention," sources said. A source said that if Sperry fails to open talks within a few days, Burroughs is prepared to make a hostile tender offer of $70 in cash for 55% of Sperry's stock. Holders of remaining shares would be offered a package of debt securities and preferred stock valued at $70 a share.

Burroughs officials see Mr. Kroger as their biggest obstacle, sources said. Mr. Kroger "sees himself as the chief executive officer without any question" and is likely to oppose the Burroughs bid, a source said.

Last year, Burroughs offered more than $60 a share in a stock swap for Sperry. But that proposal collapsed after the stock of both companies declined on news of the merger plan, lowering the value of the transaction to Sperry holders. Sperry was cool to the proposal, and delayed its reply; Burroughs finally withdrew the offer.

This time, however, because of the nature of the new Burroughs offer -- which doesn't hinge on the value of Burroughs's common stock -- Sperry's alternatives may be limited. They include seeking a "white knight" to buy the company or attempting a radical restructuring of Sperry's balance sheet to enable Sperry to launch a competing offer to buy back a large number of its shares from Sperry shareholders. But either alternative may prove difficult in the face of Burroughs's proposed $70-a-share offer, some takeover specialists said.

Currently, Sperry has a staggered board of directors, but it hasn't installed a "poison pill" defense designed to make the company prohibitively expensive to a hostile suitor.

Burroughs said that Morgan Guaranty Trust Co., Bankers Trust Co. and National Westminster Bank PLC have agreed to lend Burroughs $1.5 billion to finance the cash portion of its offer, and sources said that Morgan has told Burroughs it is confident it can raise an additional $1.5 billion by the end of the week.

Wall Street sources added that a sharp drop in interest rates since Burroughs made its offer last year facilitated the new, higher offer for Sperry.

The proposed $4.06 billion Burroughs offer for Sperry is by far the largest takeover proposal this year, and was welcomed by Wall Street investment bankers and arbitragers. The takeover business has slowed from last year's torrid pace, with fewer giant deals. Burroughs is represented by investment bankers Lazard, Freres & Co. and the law firm of Wachtell, Lipton, Rosen & Katz. Sperry is represented by First Boston Corp. and Skadden, Arps, Slate, Meagher & Flom.

Mr. Blumenthal said the merger is intended to create a new company with a new name and management team, which if combined today would have $10.5 billion in annual revenue and more than $1.1 billion in operating profit.

The executive said that Burroughs's debt as a percentage of capitalization would increase to about 60% if a merger is concluded, from 30% currently. But he said Burroughs expects that "within two years we would get back down to a ratio consistent with (current) 'A' ratings" of Burroughs securities, or about 30% to 35%. To do so, the combined company would divest about $1.5 billion in assets, Mr. Blumenthal said, and cut costs considerably through consolidation.

Mr. Blumenthal also asserted that, beginning next year, the new company's per-share earnings would be "significantly higher" than Burroughs's earnings would be alone. A merger of Burroughs and Sperry would generate substantial cost savings, said one source, who estimated that the companies combined would earn $8 a share to $9 a share in 1987 on a pro forma basis.

In 1985, Burroughs earned $248.2 million, or $5.46 a share, fully diluted. Sperry for the year ended March 31 earned $280 million, or $4.92 a share.

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THE TWO COMPANIES

Burroughs Corp.

(Year ended Dec. 31, 1985)

Revenue $5.04 billion Net income $248 million Earnings per share $5.46 Averge shares outstanding 45.6 million Employees 60,500 Shareholders 40,700

Sperry Corp.

(Year ended March 31, 1986)

Revenue $5.74 billion Net income $46.8 million Earnings per share $0.82 Common shares outstanding 57.4 million Employees 77,716* Shareholders 66,309*

* As of March 31, 1985