From Computer Business Review, a sister publication.
On November 6 1996, John Lewis, chief executive of mainframe vendor Amdahl, wrote a letter to Kazuto Kojima, the president of Fujitsu, a long-term Amdahl investor. The letter outlined Lewis’ concerns over his company’s failing profitability, a situation caused by declining margins in its products business. As a solution, Lewis proposed that Fujitsu – which already owned 42% of Amdahl – might consider the acquisition of all outstanding Amdahl shares. At a meeting a week later, Kojima made it clear that he was not interested in such a deal. In March, after another loss-making quarter, Lewis approached Kojima again. This time he did not even receive a response. Just a month later, at Amdahl’s annual stockholders meeting, Lewis approached Kojima for a third time and, finally, was given an indication that Fujitsu was prepared to at least talk about acquiring the outstanding shares in Amdahl. After that ungainly courtship, negotiations preceded at breakneck speed. By the end of July, Fujitsu had agreed to buy all the outstanding shares, finally settling on a price of $12.40, valuing the remaining public equity in Amdahl at $878m, a little over two and a half times revenues. Not a bad dowry.
But the question is, how had Amdahl, once highly profitable and widely respected, deteriorated to the extent that its own management team had lost faith its ability to survive standalone. Amdahl’s most pressing problem was clearly its deteriorating financial position. For its 1996 fiscal year Amdahl reported a resounding loss of $326.7m, on revenues which rose just 7.6% to $1.6bn. In its latest, second quarter, the company registered a slight upturn in its fortunes, reporting its first net profit in six quarters – albeit a negligible $2m, on revenues up 14% to $438m. But, this did little to offset a net loss of $11m in the previous quarter. That weak financial scorecard has had an adverse effect on customer and employee confidence, says Amdahl’s Lewis, and has damaged its sales efforts. Inferences about your viability from competitors are very good marketing ploys for them, he jibed to the Wall Street Journal. The argument is backed up by the recent experiences of Mike White, an Amdahl regional vice president, who reports: Before the announcement, the first five minutes of every sales pitch had to deal with our financial viability. It was getting tougher and tougher. With the deal out in the open, the money questions have all but ceased, says White. The problems, however, have not. Many of Amdahl’s difficulties stem from its core mainframe business, where it comes third to competitors IBM and Hitachi. Amdahl’s individual share of the mainframe market has fallen from 8% to 4.7% in the last year, a far cry from its heyday in the early 1980s, when the company enjoyed a 10% to 15% market share. Amdahl has suffered from a surplus of strategy, and a deficit of execution, believes George O’Connor, an IDC analyst. This point is clearly demonstrated by the company’s fumbled entry into the market for mainframes based on complimentary metal oxide semiconductor (CMOS) chip technology. By the time Amdahl launched its CMOS-based Millennium mainframes in 1996, IBM was already selling CMOS mainframes in large numbers.
In June of this year, both companies announced the new iterations of their CMOS mainframe systems. But while IBM’s S/390 Generation 4 is now shipping, Amdahl’s Millennium 700 is not due until the first quarter of 1998. Charles Foley, vice president of marketing for Amdahl’s Server Business Group, denies that this constitutes ‘vaporware’. Our large systems customers plan two to three years in advance. We promised to supply them with a technology roadmap, which is what we did. When the Millennium 700, starts shipping, its 75 MIPS engine will make it the largest CMOS engine available, he points out. But with IBM planning the launch of an 80 to 85 MIPS system around the same time, that leadership will be short-lived. Another area of concern is Amdahl’s beleaguered mainframe storage systems business. As far as data storage is concerned, Amdahl has dropped the ball frequently, says O’Connor of IDC. This is a point which Amdahl concedes. The company’s poor performance in its mainframe storage systems business, says Foley, was due in part to a woefully slow transition to RAID technology, resulting in a loss of valuable market share. We’ve not had the greatest products over the years, agrees Bell. Foley, however, attests that with sales of the Spectris family of mainframe storage products growing at a rate of 25% per quarter, Amdahl has found the answer. What is more, he says, sales of the company’s open systems storage product line, LVS, have a runrate of 50%. Away from that upside, Amdahl’s response to its hardware weaknesses has been to aggressively build up its software and services businesses. It acquired DMR in 1995 and Trecom Business Systems last year. The strategy has paid off, according to Bob Djurdjevic, president of Annex Research. They’ve been more successful in transforming the company than most people give them credit for, he says. Two-thirds of Amdahl’s revenues now come from non-hardware sales. However, revenues from the services business have not proved sufficient to offset major losses on the products side. Nevertheless, the switch to a more service- centered strategy seems to have been Amdahl’s saving grace. According to Alan Bell, an Amdahl vice president, the company’s long-standing service reputation among blue-chip companies was one of the reasons Fujitsu changed its mind about buying the company.
Bolster its presence
But is Fujitsu the ideal home for Amdahl? Although the Japanese technology giant is the world’s third largest systems companies, it is not without its own problems. It recently surrendered the number two position to rival Hewlett-Packard, and for its last fiscal year, it saw net profits fall 27% to $395.8m. Furthermore, over two-thirds of Fujitsu’s business is conducted in the Japanese domestic market. The company now hopes the acquisition with Amdahl will further bolster its presence in the US and Europe. Bell believes this will be the case, pointing to Hitachi’s success in selling through its US-based operation, Hitachi Data Systems, as evidence of the potency of the partnership. Fujitsu is also looking to improve operational efficiencies in both companies, but insists that this poses no threat to jobs. While analysts agree that Amdahl’s future now looks more certain, the problems are not over. There may be more cash in the bank, but as many other companies have shown, money alone is not enough.