From Computer Business Review, a sister publication
Unisys is splitting into three autonomous businesses. Is that enough to revive the company’s fortunes?
Ten years ago this Summer, Michael Blumenthal and Gerald Probst, chief executives at two of the oldest and most respected companies in the computer business signed off on the industry’s biggest ever merger deal. In doing so, the executives relegated Sperry and Burroughs to the pages of history. As the ink dried, though, they were left with one major problem: The provisional name they had chosen for the new multi-billion dollar creation, Nova Corp, was already taken. So, with a view to bolstering esprit de corps, the two invited their 120,000 employees to come up with a name. From those suggestions Blumenthal and Probst selected Unisys – a contraction of United Information Systems – and launched the new company with the promised that it would deliver ‘the Power of Two’. The odds are that, 10 years on, whoever suggested the Unisys name is long gone, one of the 90,000 company employees that have been axed from the once 120,000-strong payroll company over the past decade, as Unisys has contracted from $10 billion to $6.2 billion and struggled to stay out of the red. Those laid- off workers may justly feel that the promise of ‘the Power of Two’ has never been met, and they are not alone. Unisys shareholders last received a dividend on their investment four years ago, and have watched the company’s share price slide. Not surprisingly, some shareholders are losing patience. In recent months, Greenway Partners, which hold just under 5% of Unisys stock, tried to lead a shareholders’ revolt that took breaking up the company and selling off its lines of business as its central proposal. Predictably, Unisys management has been dismissive of the motion. They have a different kind of break-up in mind. Under the leadership of CEO Jim Unruh, the management team is pushing ahead with its latest strategy for reviving the company’s fortunes, an internal demerger of business activities that is characterized as ‘three businesses/one company’. This is not the AT&T model of a company split into independent stock companies, says Jim Unruh. Success will depend on [the three units] being able to continue to work together seamlessly and on having the cost and operational benefits of shared [corporate] services, sales channels and other interrelated assets. So far, the board of directors is fully behind the management’s three-way split, concluding that the interrelationship of these units and other serious business risks argue against [the establishment of] three publicly-held companies. But as the company embarks on its third major corporate restructuring in two years, even the most optimistic observer of Unisys’ fortunes must be questioning whether it will be lucky this time around.
Out of a hole
The hole that Unisys finds itself in is not entirely of its own making. In 1985, when the merger was first mooted, both Burroughs and Sperry had reasonably secure market positions and reputations for quality products. Burroughs was known as a manufacturer of mainframes, the highly regarded A-Series, which were commonly used to drive corporate databases. Sperry’s 30 1100 series mainframes had earned a good reputation for high-performance transaction processing, running high-speed applications such as airline reservations. However, for mainframe manufacturers that operated outside of the IBM world, the mid-1980s was a frustrating period. At the low-end of their product ranges they suffered increased competition from the growing potential of minicomputers, with companies such as Digital Equipment, Data General and Wang aggressively entering their market space. At the same time, at the high end, they were up against IBM, which was then reaching the height of its market omnipotence. It was under these circumstances that Blumenthal, then chairman of Burroughs (and a former US Treasury Secretary under President Carter), convinced both parties that the two companies combined could do better than as competitors. Post merger, he set about realizing economies of scale in manufacturing and development, pruning 24,000 staff from the payroll and disposing of $1.8 billion of assets. In its first year, Unisys’ combined sales rose 48% to $7.4 billion, although its initial restructuring charges forced a small loss of $43.4 million. During the next 12 months, Blumenthal’s formula continued to work, as sales grew 22% to $9.7 billion and Unisys banked its first net profit, a satisfying $578 million. Given that picture, the apparently invigorated new company was given the green light to diversify into growth sectors – to build a wider focus beyond the mainframe. In 1988, it acquired one of the world’s biggest data communications specialists, Timeplex. Later that year, it bought Convergent, an early pace setter in the Unix workstation sector. That year ended with sales up marginally at $9.9 billion as net income increased 15% to $681 million. In different circumstances, the regeneration of Unisys as a broader-based supplier of computer and network systems products may have been accomplished within one or two more years. But, in 1989, Blumenthal and Unisys’ luck ran out as the company met the same collapse in demand for mainframes which stopped IBM in its tracks. That market slump damaged all mainframe manufacturers. But for Unisys, still heavily dependent on mainframe revenues and caught in the transition from a mainframe to broader supplier, it was a blow that sent the company into a tailspin. In 1990, Unisys lost $639 million on revenues of $10 billion, and the following year, as the company ran up another $437 million of losses, Blumenthal departed. In 1991, his successor as CEO, Unruh, was quick to stop the rot. He instigated a further cycle of restructuring, closed almost half the company’s remaining 15 manufacturing plants and disposed of a variety of non-core assets. The bill for all that contributed to a mammoth loss of $1.4 billion on revenues that declined 15% to $8.6 billion. Unisys’ annual sales have declined ever since and last year, at $6.2 billion, they are now 17% less than when the company was created. If Unisys were still essentially the same company that it was in 1985, it would be fair to conclude from its recent history that it is reaching the end of rapid and inevitable decline: Ripe either for the attentions of a predator or, as Greenway Partners believe, for dismemberment and disposal. However, Unisys is a different entity from a decade ago. As it trumpeted at the beginning of this year, its days of reliance on the mainframe market are a fading memory. Rather it has become a composite of three potentially profitable businesses that it intends to operate independently: The Computer Systems Group (CSG), which will focus on building and re-selling systems; the Information Services Group (ISG), focused on systems integration services; and the Global Customer Services group (GCS), which offers desktop, systems and network computer services. That structure came into force in January, and given the $624 million Unisys recorded in losses during 1995, probably all of these units are currently unprofitable. But, ironically, an additional weaknesses in Unisys’ balance sheet – its huge debt of $1.9 billion – may actually buy Unisys the extra time it needs to complete the turnaround. Just the thought of who would take on that debt burden in the event of a complete break-up makes the idea unpalatable. In fact, Unruh’s logic, for the time being, is that to reduce debt long-term, the company needs to borrow more now. To cope with 1996’s hefty restructuring charges and to service current debt repayments, Unisys raised another $724 million in March in private financing, with repayments not due until 2003 and 2006. Along with some of the company’s $1.1 billion in cash, the financing will be used to handle the $400 million cost of this year’s round of lay-offs. But this year the company still faces $430 million in on-going debt repayments and a further $430 million next year. The new corporate structure is much more than simply a renaming exercise. Across the whole of its US and European businesses, representing 75% of the company’s total business (the Asia/Pacific region was thought to be too small to justify a split into three and continues to operate under the old structure), Unisys has effectively stripped out four of its previous layers of management. In the process it has demolished the old matrix-based management structure which replicated management structures across geographically defined business regions. The benefits to this approach, says Unruh, are essentially simplification, accountability and responsibility, benefits which he believes will lead to faster decision making, reduced costs and, ultimately sustainable profitability and growth. The matrix structure was becoming too costly and too slow, he argues. Cycle times are important in this business and matrix structures are not consistent with fast cycles.
Success on a global scale
With the strategy in place Unruh suggests that the key now is to improve the fundamental execution. The new structure gives focus to each management team and with that it brings accountability. We will look at the profitability and the business success of each business on a global scale. The businesses are being given responsibility for their own profit and loss and the freedom to pursue their own economic and business models. The resources the presidents of each of the units have been given include their own R&D budgets and, for the first time, their own dedicated sales forces. The latter change is particularly radical for a company often characterized as being strong on products and technology, but weak on sales and marketing. Some constraints on the businesses will stay. Sales staff, for instance, will be compensated according to the value of the gross business they attract, rather than on sales volumes, since this reflects the best value for the company as a whole. And the presidents will also be rewarded according to the overall performance of Unisys, rather than according to the performance of their individual business groups. The three way split might seem like an alarming prospect to some of Unisys’ larger customers, who might be clients of all three of the new businesses. 80% of the company’s existing client base buy products or services from at least two of the new Unisys units, and more than half of all clients are involved with all three. To lessen the irritation of having multiple sales teams calling on these large accounts, the company has established a cadre of around 65 large account executives who will oversee Unisys’ top 100 customers. On paper, the logic behind the new structure looks compelling, particularly since, viewed on their individual merits, each of the businesses appears to be potentially very strong. Each, for instance, already has an established global presence, and each has annual sales approaching, or in excess of $2 billion. Most important of all, from Unisys’ corporate perspective, each of the new businesses is already a significant way down the path to becoming the high- growth, wider margin businesses which the company needs to build if it is to successfully escape the declining-margin, low-growth trap that it found itself in during the late 1980s. Part II of this feature in tomorrow’s News Analysis section.
