Burroughs, in Challenge to I.B.M., to Acquire Sperry for $4.8 Billion

By David E. Sanger
The New York Times

May 28, 1986

Two of the world's largest computer makers, the Burroughs Corporation and the Sperry Corporation, agreed yesterday to merge in an effort to create the most potent competitor to the International Business Machines Corporation.

Under the long-expected agreement, which received Justice Department antitrust approval last week, Burroughs will acquire Sperry for $76.50 a share in cash and securities, or $6.50 more than it first offered three weeks ago. The total cost will be $4.8 billion.

Burroughs has argued that a merger would create economies needed to compete effectively against I.B.M.

But industry analysts say they are skeptical that the strategy will dent the world's largest computer maker, which controls more than two-thirds of the market for mainframes, the largest commercial computers.

The joined companies will leapfrog the Digital Equipment Corporation to become the nation's second-largest computer company, but even with their combined annual revenues of about $10 billion, Burroughs and Sperry will be only a fifth the size of I.B.M. Still, it is the first major shift in the mainframe computer industry since RCA and General Electric abandoned it more than 15 years ago.

Yesterday's deal came after Sperry, unable to find another suitor to save it from the unwelcome tender offer from Burroughs, gave up last-ditch efforts to remain independent. But it exacted a higher price than Burroughs had wanted to pay. [Page D1.] A Fierce Debate Reported The decision to merge was reportedly marked by a fierce debate within the paneled, circular 43d-floor board room at Sperry's headquarters on the Avenue of the Americas at 51st Street, where younger Sperry executives preparing to take charge of the beleaguered company reportedly opposed the merger strongly.

But with no alternatives, the board of directors gave in to W. Michael Blumenthal, the former Treasury Secretary who has led Burroughs for six years. The aggressive Mr. Blumenthal has argued that the computer industry desperately needs a company with what he termed the ''critical mass'' to oppose I.B.M.

Together, Mr. Blumenthal has argued, Burroughs and Sperry could save hundreds of millions of dollars in overhead and research and development costs and could take advantage of Sperry's strength in military, airline and transportation systems and Burroughs's strength in banking and other financial services.

In a recent interview, between puffs on his ever-present Dunhill cigar, Mr. Blumenthal readily conceded that there were psychological motivations as well.

''We are trying to get over the fear factor - the fear that no one has the staying power against I.B.M.,'' he said. ''Once you get to a certain size - and no one has reached it yet -that fear tends to lessen.''

But analysts throughout the computer industry doubt the merger will accomplish that goal.

The chief problem, they maintain, is that for 30 years Sperry and Burroughs have produced computers that cannot run the programs written for another manufacturer's machines. And Mr. Blumenthal has promised not to make any effort to merge the two separate computer lines, acknowledging that each company's biggest asset is its broad base of corporate users with billions of dollars invested in their computer systems. Any sign that one of those systems was doomed could lead some of the nation's biggest computer users to switch to I.B.M. Effect on I.B.M. ''Ironically, it could turn out that I.B.M. is one of the big winners,'' said Stephen P. Cohen, a vice president of Gartner Securities, a Stamford, Conn., investment research firm that follows the computer industry. ''A number of Sperry users are fence-sitters, thinking about switching to I.B.M. equipment but worried about the expense. This may drive them into the I.B.M. camp.''

Other analysts agreed that the chance of success against I.B.M. depends largely on how well Burroughs puts together the merged company. In addition, they say, Burroughs must solve a host of technological problems at its Memorex division, which has dragged down the company's profits.

''Theoretically, a larger company should be a much better competitor, but I'm not sure it's going to work out that way,'' said Esther Dyson, publisher of Release 1.0, an influential computer industry newsletter. ''It's very hard to unite companies like this, and it may prove they are spreading themselves too thin.''

Many details of the merger - including the merged company's new name - were unresolved last night. Sperry said only that it had accepted an offer under which Burroughs would pay $76.50 in cash for 31 million Sperry shares, or about half the outstanding stock. The remaining shares will be converted into convertible preferred Burroughs stock and 9.75 percent subordinated debentures. Burroughs will pay for the shares with a $3 billion line of credit it arranged when it made its $70 offer.

On the New York Stock Exchange yesterday, Sperry's stock closed at $74.25 a share, up $1.125. Burroughs ended at $59.50, down 37 1/2 cents.

Neither company would say what role, if any, would be played in the new company by Gerald G. Probst, Sperry's 62-year-old chairman. Nor was there word about the role of Joseph J. Kroger, a longtime Sperry computer salesman who became the company's second in command last year after winning a power struggle with other executives who believed that Sperry should be sold.

No Public Statements

None of Sperry's top executives have spoken publicly since Burroughs renewed its takeover efforts earlier this month, and a Sperry spokesman said none would speak about it yesterday. Burroughs officials said Mr. Blumenthal was meeting with Sperry officials in New York, working out terms of the definitive agreement and was not available for comment.

However the final details are worked out, industry experts express few doubts that the deal marks a major turning point in the turbulent history of the computer industry.

Thirty years ago, at the dawn of the computer age, Sperry seemed likely to leave I.B.M. in the dust. With the acquisition of Remington Rand and its Univac computer in 1955, Sperry was the indisputable leader of mainframe computer technology.

But in the 1960's Sperry lost its touch, as I.B.M. raced ahead in technology and with a corps of eager young sales representatives who soon covered the globe. In the 1970's, even as I.B.M. was reeling under antitrust suits, Sperry suffered further as its ventures into farm equipment and hydraulics also failed.

If Sperry was best known in the 1950's for selling the computer that predicted Dwight D. Eisenhower's victory on election eve in 1952, it was perhaps best known in the 1980's as the manufacturer of the Internal Revenue Service computer system that broke down last year, fouling the processing of millions of returns.

Burroughs has fared better in recent times, as Mr. Blumenthal filled the executive suite with marketing and manufacturing specialists drawn from competitors, including I.B.M. The Detroit-based company, founded 101 years ago by the man credited with the invention of the first practical adding machine, saw its mainframe line rebound somewhat, but Mr. Blumethal still complained that ''in mainframes, we're a rabbit to an elephant.''

Thus, expansion quickly became a key element of Burroughs' strategy. More than a year ago, working in their Detroit headquarters, Mr. Blumenthal's aides began scouting potential prospects - reportedly looking chiefly at the old-time I.B.M. competitors such as Sperry, NCR and Honeywell.

Company sources report that he quickly settled on Sperry, drawn by its highly profitable military electronics business, its sales strengths in transportation and utilities and its strong position in West Germany, Scandanavia and Italy, where Burroughs is weak.

What the acquisition of Sperry does not give Burroughs is any additional strength in software or telecommunications, where markets are growing far faster than for mainframes.

Mr. Blumenthal conceded recently that the merger with Sperry ''is not a combination that solves all of our problems.'' Some analysts expect him to sell some assets and purchase a telecommunications concern, along with some software talent.