Computer leasing executives say that 1988 was the toughest year for their industry in a long time. By our reckoning, there hasn’t been so much red ink spilled in computer financing since the beginning of this decade. At that time, the leasing trade was hurt by the collapse of the used 370 market. The problem then began in January 1979 with IBM’s announcement of the 4300s and worsened as IBM shipped the machines in volume, displacing older equipment. IBM was hit, but took its lumps more than a year before the third parties. When the 4300 set new price-performance levels, big users switched from the purchase of 303X systems to monthly rental, forcing IBM to capitalise a big portfolio. IBM, caught unawares, had an off year. The wiser leasing companies took evasive action. Not all of the third parties were on top of things, however. In 1981, Itel – with a bunch of nincompoops at the helm – capsised, swamping Lloyd’s of London which had insured it against some losses. As it sank, Itel beached dozens of users who had never questioned the economic folly written into their leases until it was too late. Shortly afterward, OPM Leasing, for a few years a good case for the proposition that crime pays, was busted for fraud and itself went bust. It, too, left plenty of lessees holding the bag. Around the same time, several less visible leasing companies saw their profits vanish. Later, the market saw these lessors quietly fade away. There were relatively few user casualties that resulted from those liquidations. From 1980 until 1985, IBM’s profits rose. With a one-year lag, so did the earnings of most leasing companies. But in 1986, IBM got into trouble again, and profits fell. Unless 1988 was a lot better year than Wall Street expects, the company’s earnings will still fall short of those in 1985. IBM is probably looking to this year for its next high water mark. The company’s reaction to shrunken earnings is apparent across its product line, to say nothing of its diminished workforce. It is clear that IBM’s cure involves flushing older machines out of the market at a furious rate and pumping tons of new iron into the vacuum. Third-party lessors, dependent on an accurate assessment of IBM for their survival, are just now getting a taste of IBM’s bitter medicine. Used equipment is going down the drain, and a lot of lessors’ plans based on high residual values have gone awry. The leasing landscape resembles that of the early 1980s. The smart players have had time to adjust their businesses to the new, arduous conditions. Those with slow reflexes are hurting, but they’ll live. The companies that if IBM’s best interests and their own were automatically aligned are losing money. The result has been a rash of leasing failures and a few near misses. The problems in the leasing trade aren’t over yet, and probably won’t be for another year. So this is a good time for lessees to study the situation. Some of the hazards should be easy to avoid. Despite the strains in the industry, several small lessors have just been gobbled up by larger entities. There is no single explanation for all these acquisitions, but there is a general theme. The entrepreneurial firms that sold out all felt that times had gotten too tough. This is not to say that they were in trouble. We know some of the erstwhile owners; their companies’ buyers made them millionaires. Nonetheless, we view the trend as another signal that lessees had best stay alert. A few of the firms that have been bought out – IPS and Princeton Computer Group, for instance – were worth a nice bundle. We can understand the motives of the buyers, but we also sense that the sellers saw hard times a-comin’. The larger, wealthier entities that picked up the lessors should be able to ride out the storm a lot better than any small company. It isn’t the buyouts that make us nervous. It’s the selling. At the very same time as some lessors are getting offers they daren’t refuse, others are folding up their tents. Sour deals The past few months have witnessed the closing of Unicom and First Alliance, each the
result of mistakes in the leasing business. In both cases, the lessors had been associated with income funds, so their problems will back up on lease investors. In addition, any payments the lessors owe on equipment subleased from other companies (whether users or third parties) will have to await the outcome of the associated bankruptcy proceedings. The predominance of losses at these lessors – and at other companies that are sound but nevertheless unhappy with sour deals – stems from users’ disinterest in older terminals and disks. In general, mainframe leasing has been extremely profitable for lessors that invested early in both 308X and 3090 processors. This is one difference between the current leasing cycle trough and the prior dip, but not the only one. The last downturn was short-lived, like IBM’s profit decline. This slump isn’t over yet, and IBM’s most recent financial headache lasted the better part of three years. – Hesh Wiener. Copyright 1989 Technology News of America Co Inc.