Burroughs Offers $4 Billion in New Effort to Buy Sperry
In an avowed bid to challenge IBM’s dominance of the computer industry, Burroughs Corp. on Monday offered to buy Sperry Corp. for $4.06 billion--seeking for the second time in less than a year to merge the two companies into the second-largest computer maker in the nation.
“The idea is to provide a really formidable competitor for IBM,” Jeanette Lerman, Burroughs vice president for corporate communications, said when the offer was announced shortly after the New York stock markets had closed.
Detroit-based Burroughs, the nation’s sixth-largest computer maker with annual revenue of $5.04 billion, is offering $70 per share for New York-based Sperry, the fifth-largest computer manufacturer with revenue of $5.7 billion.
A spokesman for Sperry declined comment on the offer.
If merged today, the proposed new company would have combined annual revenue of about $10.7 billion, compared to IBM’s sales of $50 billion. The corporate marriage would boost the new company into second place, however, surpassing Digital Equipment and Honeywell--both with revenue of about $6.6 billion.
But market analysts were skeptical.
“This merger didn’t make sense the first time, and it doesn’t make sense today,” said Jan Lewis, president of Palo Alto Research Group in San Jose.
“It’s an example of the ‘rock theory'--they’re both having trouble floating, but someone thinks that tying them together will help.”
And Sandy Gant, an industry analyst with Infocorp in Cupertino, Calif., dismissed claims that the merger would seriously challenge International Business Machines.
“In the short term, I’d expect each partner to be slightly less competitive because they’d be spending a great deal of corporate energy getting used to each other--getting married,” she said. “In the short term, it will be easier for IBM to compete.”
Burroughs’ offer--55% of which is cash, with the balance to be a combination of Burroughs preferred stock and debt securities--comes at a time of general malaise in a computer industry still recovering from a depressed performance in 1984-85. Burroughs was not immune, and its first-quarter profit of $25.4 million is only about one-third of its year-before level.
Sperry showed some improvement in the fourth quarter ended March 31, with operating income rising 7%. Operating income, however, was down 3% for the full year.
In addition to difficulties in the computer industry, Sperry was beset by lower profits in its defense and aerospace businesses, which experienced a strike and production problems.
“The merger will create a new company that will significantly raise the level of competition in the worldwide computer industry and create a major supplier of defense-oriented systems,” Burroughs Chairman W. Michael Blumenthal said in a prepared statement. Blumenthal said the merger is intended to create a new company with a new name and a combined management team. Its combined annual operating income would exceed $1 billion, and its combined customer base would have more than $30 billion in computers.
Sperry has been a merger target for more than a year. Last year it discussed merging with ITT, and there was rumored interest by such prospective partners as Ford, Martin Marietta and American Telephone & Telegraph. In June, Burroughs offered $3.5 billion in a proposed all-stock transaction. However, the offer collapsed a few days later when Sperry failed to accept the bid before a Burroughs-imposed deadline expired.
Burroughs spokeswoman Lerman said no deadline has been set for a Sperry response to the current offer.
“We think this is a very handsome offer that will have to be seriously considered by management,” she said. “This is a merger of opportunity, not necessity.”
She said the new company would be a formidable competitor for IBM, which, she said, enjoys “a quasi-monopoly.”
“The feeling has been that the competition is between IBM and Japan, but our national interest is better served from more internal competition,” Lerman said.
In a pointed reference to IBM in its formal statement announcing the offer, Burroughs said: “It is not characteristic of America to pin its national interests to a single mega-corporation; nor is it reasonable to expect foreign governments or foreign markets to accept domination by such a corporation.”
While analyst Lewis agreed on “the goal of building up some of our U.S. companies,” she predicted that a combined Burroughs-Sperry corporation “won’t have much impact.”
“They may be No. 2, but they won’t control any significant part of the market,” Lewis said.
Burroughs’ Blumenthal, who will discuss the offer at a press conference in New York today, said the merger would result in “very large cost and expense savings” by streamlining operations ranging from manufacturing to procurement and capital expenses.
“The merger represents a unique opportunity . . . to unite our strengths,” he said.
One area of strength acknowledged by market experts is research and development, where the new company would have combined spending commitments of $700 million a year.
Burroughs, established in 1886, has been in the computer business since 1956. Sperry, founded in 1933 as a manufacturer of navigational guidance and control equipment, is a pioneer of the computer industry. It built the first digital computer in the United States in 1946.