Honeywell and 2 Overseas Firms Discuss Venture : Combined Effort Would Form Major New Player in Large-Computer Market
Honeywell, seeking to remain competitive in the rough-and-tough computer industry, announced Wednesday that it is entering talks to combine its computer operations with those of NEC of Japan and Groupe Bull of France.
Minneapolis-based Honeywell said it is seeking to form a partnership with “the size, technological base and international market position to be a more effective competitor in the worldwide computer industry.”
However, formal talks have not begun and officials from the three firms would not speculate on what form any possible joint venture or new company would take. Honeywell already has extensive business relationships with both NEC and Groupe Bull, and many of the firms’ computer products are similar--conditions that should augment any combination, analysts said.
The deal is seen by industry analysts as part of the continuing consolidation of the computer industry, brought on by overcapacity, weak demand, high costs of research and development, and the difficulty of competing against industry giant International Business Machines.
Earlier this month, Burroughs completed its $4.8-billion purchase of Sperry, creating the world’s second-biggest data processing company after IBM. Other mergers and joint ventures are expected.
High Costs of R&D;
“Mergers, consolidations, joint ventures, research sharing have got to be done,” said Thomas J. Crotty, president of Gartner Securities, a Stamford, Conn.-based brokerage specializing in technology companies. He said many companies cannot afford on their own the high costs of research and development across a broad product line.
The deal also is seen as helping Honeywell remain competitive in computers. Like Sperry, Burroughs and several other U.S. high-technology firms, Honeywell has had difficulty competing against IBM, which has as much as 60% of the U.S. large-computer market.
Analysts said Honeywell in recent years has lost market share and has not spent enough money to develop and maintain new technologies to remain competitive. Honeywell blamed the slump in its U.S. computer markets for a 37% drop in its first-half 1986 earnings to $62.3 million from $98.7 million. Honeywell’s information systems division, which sells mainframe computers, supercomputers and other products, made up 30% of its $6.6 billion in revenue last year.
Instead, they said, Honeywell has increasingly focused on its core businesses of producing automation and control products, including thermostats, security devices, factory automation systems, aerospace flight controls and navigation systems.
Protection From Takeover
“Honeywell has proved it knows the automation and control business (but has) not proved in the past decade that it knows the computer business,” said Donald Bellomy, analyst at International Data Corp., a Framingham, Mass.-based high-technology market research firm. On the other hand, he said, “NEC has proven it knows the computer business.”
The deal also could make Honeywell less vulnerable to a takeover by boosting its stock price and profitability, analyst Michael Geran of E. F. Hutton said. The company’s depressed stock price and the likelihood of further industry consolidations have fueled persistent rumors that the firm is a takeover target.
A sale of Honeywell’s computer business to Bull and NEC were rumored on Wall Street last week, sending Honeywell’s stock sharply higher. But the company surprised analysts by announcing instead that it was considering the purchase of Sperry’s aerospace and marine group. Honeywell still is considering such a deal, spokeswoman Kathy Tunheim said Wednesday.
Honeywell’s stock fell $1.375 to $70.50 a share on Wednesday in consolidated New York Stock Exchange trading.
A Honeywell-NEC-Groupe Bull venture also would expand the presence of the Japanese and French firms in the lucrative U.S. market. NEC, Japan’s second-largest computer maker, has been trying to gain a greater foothold in the United States. To that end, NEC recently agreed to form a joint venture whereby Honeywell would market NEC supercomputers in North America.
That venture is expected to begin operations before year-end.
Bull, one of Europe’s biggest computer makers, has jointly developed computers with Honeywell for years, while both have marketed each other’s products in North America and Europe. Honeywell, which once owned as much as 66% of Bull, now owns less than 5%.
Honeywell, NEC and Bull also have been sharing technology for years, which makes their computer systems similar in design and compatibility. With such similarities and a long working relationship, “the problem of integrating the three firms is a whole lot easier than integrating Burroughs and Sperry,” analyst Crotty said.
However, analysts said, any resulting venture is still not likely to be formidable enough to make a sizable dent in IBM’s market share. “This venture can prevent further erosion of their existing market share,” analyst Bellomy said. “It is a defensive move rather than offensive.”
Representatives of the three firms said it was too early to comment on the financial details of any venture.
A spokesman for Groupe Bull in Paris, who asked not to be identified, said it was too early to say whether the firm is interested in taking a stake in Honeywell’s computer division. “We can only judge that on the basis of the talks,” he said.
Koichi Shimbo, a New York-based spokesman for NEC, said the company had not received any formal request or proposal from Honeywell.
Analysts, however, speculated that the three firms would form a new company with each having an equity stake, although Honeywell may have the highest stake or receive money from the other two since it can offer more in the way of assets and marketing punch.
A possible combination would probably use each firm’s strengths: NEC in technology and telecommunications, and Honeywell and Bull in marketing and services, analyst Crotty said.
