Desperation in Blumenthal Bid for Sperry
What’s behind Burroughs Corp. Chairman W. Michael Blumenthal’s flamboyant $4-billion bid to acquire Sperry Corp. and produce a new contender in the computer industry?
More desperation than vision, despite Blumenthal’s talk of creating strong competition for International Business Machines. To be sure, if Burroughs, which has $5 billion in revenue, were to merge with Sperry, which has $5.7 billion, it would produce a distant No. 2 to IBM--which had $50 billion in revenue last year. But IBM has nothing to fear; the company would be no more threat to its dominance, and perhaps a bit less, than Burroughs and Sperry separately are today.
Why? Because profitability is anemic at both Burroughs and Sperry, and merging the two won’t make them robust. They are among the also-rans in the business, meaning most of the manufacturers of large computer systems, or mainframes, which don’t make enough profit to get out from behind the eight-ball.
Simple, Demanding Business
The mainframe business is both simple and demanding. It is simple because customers tend not to switch suppliers. It can cost millions of dollars, to say nothing of untold operational disruption and grief, to convert from one computer system to another. So customers tend to stay with you as long as you keep upgrading their equipment with the latest in computer and programming technology.
That’s the catch, of course. Keeping technology up to date and new products flowing takes investment. And to keep up investment, you need profits to plow back into the business. IBM, the market leader, makes 13 cents in net profit for each $1 of revenue. Burroughs and Sperry each make less than a nickel. Yet they must shoulder their share of spending on research and product improvements, just as IBM does. So they augment resources by borrowing, but that only means that interest payments take a fraction of their already low profit.
Meanwhile, IBM has more ready cash ($5 billion) than it has debt ($3.9 billion); more cash lying around, that is, than the total sales of Burroughs or Sperry. If you’ve ever nursed a diminishing stake at poker while looking across the table at a growing pile of chips, you know the feeling. IBM can cover every bet while the also-rans struggle to stay in the game.
Should Recognize Reality
One computer analyst, Barry Tarasoff of Wertheim & Co., thinks the also-rans should now recognize reality and cut back on their struggle. That is beginning to happen. Along with its own products, Honeywell Inc. now markets computers from NEC of Japan--giving up some business to save the cost of product development. Sperry last November concluded an agreement with Hitachi that could put the Japanese company’s parts in Sperry’s computers.
Blumenthal, a one-time secretary of the Treasury who became Burroughs chairman five years ago, decided that his way would be to add Sperry’s customers to his own. The idea is not to convert them to Burroughs equipment but to achieve whatever economies are possible from having one company run parallel product lines.
Ideas born of desperation are often flawed. The $240 million or so annual interest on the $3 billion that he is borrowing to do the deal would hobble the new company’s profit initially. And Sperry customers, concerned that a mere subsidiary computer supplier would be less inventive, might well slip away over time.
As it is, Burroughs may not get its prey. Sperry clearly is casting about for an alternative. Rumor has it asking Ford Motor or other companies to acquire it for its military business--the aircraft and marine navigation systems that stem from its Sperry Gyroscope lineage rather than its Univac computer origins. One way or the other, though, the company that in 1946 developed the first digital computer is pretty certain to lose its independence.
Why did it decline? Because, like the other also-rans, it competed as a me-too in mainframe markets that are IBM’s strength. Not everybody made that mistake. NCR, the old National Cash Register Co., successfully cultivated business among customers in retailing. It earns decent profits, and survives. Digital Equipment and Hewlett-Packard focused on markets in engineering and science, where the more office-oriented IBM has never made great strides.
The common denominator? They defined their markets and had a vision of their business that went beyond size. Even American Telephone & Telegraph, comparable in revenue to IBM and perhaps its most potent long-term competitor, knows that size alone won’t help it. AT&T; puts faith in its communications capabilities and in its UNIX software system.
Mike Blumenthal, however, touts only the size of a Burroughs-Sperry combination as an argument for the merger. It may be, alas, that he has little else to talk about.
