Sperry, Burroughs Discussing Possible Merger
Sperry Corp. and Burroughs Corp. said Thursday that they are discussing a possible merger that would create the world’s second-largest computer manufacturer, with annual revenue of more than $10 billion.
Company officials would not elaborate beyond a terse statement saying they are “involved in negotiations with respect to a common stock merger.” Industry analysts speculated that Burroughs might pay at least the equivalent of $3.5 billion for Sperry, a price that would make the deal the largest in the computer industry’s history.
A key reason for such a merger would be to help third-ranked Burroughs and seventh-ranked Sperry resist the growing dominance of industry leader IBM, which has continued to gain market share at the expense of the two firms and others, analysts said.
The announcement follows nine months of speculation about the plans of New York-based Sperry, which discussed merging with ITT Corp. early this year and has also been rumored as a possible merger partner for Ford, Martin-Marietta, American Telephone & Telegraph and others. Rumors of talks between Sperry and Detroit-based Burroughs began about a week ago.
In reaction to the announcement, Sperry’s stock fell 25 cents to $56.50 a share, and Burroughs’ dropped $3.125 to $56.25.
Wall Street’s first reaction was tepid, with analysts voicing concern that the two firms would face major difficulties trying to fuse incompatible product lines and different corporate styles. “It might make sense over the long term, but in the short term it can only mean pain,” said Michael Geran, an analyst with E. F. Hutton & Co.
The companies’ mainframe, or large-scale, computers are incompatible, analysts noted, and merging the two products lines would require enormous expense and years of labor. The companies would not wish to maintain incompatible lines, for that would mean separate hardware and software development efforts, as well as separate inventories of spare parts, they said.
A former Sperry official noted also that the companies’ corporate cultures are different, with Sperry placing a greater emphasis on technology and Burroughs on marketing. “There are lots more difficulties there than meet the eye,” said the former Sperry official, who noted that the companies considered, then abandoned, plans for a merger in 1980.
Industry observers cited the difficulties encountered by Honeywell Inc. in absorbing the computer operations of General Electric after buying them in 1970.
In contrast, many analysts had been enthusiastic about talk of an ITT-Sperry union, arguing that ITT’s telecommunications capabilities would be well joined to Sperry’s computer line because of the companies’ increasing efforts to join the two technologies. The talks with ITT broke off because the two could not agree on terms, the companies announced March 1.
On the favorable side, observers said a merger of Sperry and Burroughs would create a firm with an annual research budget of more than $1 billion. Research on basic computer technologies could yield skills that would be useful to strengthen even incompatible product lines, analysts noted.
Stephen Cohen, an analyst and vice president of Gartner Group, a research firm in Stamford, Conn., said the two firms both have significant business with the U.S. government. The U.S. government accounted for about 28% of Sperry’s revenue last year, mostly in defense and space contracts, and 11% of Burroughs’ 1984 revenue.
“There would be at least some synergy from combining those businesses,” he said.
Cohen said that, between 1979 and 1983, International Business Machines’ share of the market for large-scale computers grew to 76% from 70%, while Burroughs’ share declined to 6% from 7% and Sperry’s share fell to 3% from 4%.
With annual revenue of $44 billion, IBM would still dwarf the combined firm. Burroughs’ revenue for the 1984 fiscal year came to $4.88 billion, while Sperry’s revenue from information processing came to $4.2 billion. The company’s total revenue was $5.69 billion.
Sperry’s beleaguered New Holland farm-equipment company accounted for 13% of those sales. Analysts speculated that, if the two companies agreed to merge, they would try to sell that division. The guidance and control systems division provided the remaining 14% of revenues.
Combined, the companies’ revenue would surpass that of Digital Equipment, the world’s second-largest computer company, with $6.2 billion in revenue from data-processing products and services.
Analysts say both Burroughs and Sperry must start attracting new customers rather than relying for revenue on products they sell to existing customer bases.
They give generally good marks to Burroughs Chairman W. Michael Blumenthal, a former U.S. Treasury secretary who joined the firm in 1979. He has increased research spending and accelerated the pace of product development at the company, which early this year introduced a line of mainframe computers designed to compete with IBM’s new mainframe series, called Sierra.
Most analysts are less sanguine about Sperry. The company has recently begun marketing small and medium-size computers made by other firms under its own nameplate, in recognition that it cannot wait for its own product development efforts.
SPERRY AND BURROUGHS AT A GLANCE Sperry Corp. New York--based Sperry is the world’s seventh--largest maker of computers and related equipment. It also has operations in defense electronics, aviation controls and farm and industrial equipment. Financial data for year ended March 31, 1985.
Revenue $5.687 billion Net income $286.7 million Employees 77,716 NYSE 12--month high $57.375 NYSE 12--month low $33.75 Thursday close $56.50
Burroughs Corp. Detroit--based Burroughs is the world’s third--largest maker of computers, producing a wide range of data--processing equipment for business. Financial data for year ended Dec. 31, 1984.
Revenue $4.875 billion Net income $244.9 million Employees 65,300 NYSE 12--month high $66,125 NYSE 12--month low $48.75 Thursday’s close $56.25