Many harried chief executives quit their jobs to spend more time with their families or, more commonly, with their golf clubs. James Unruh, chief executive and chairman of Unisys, and a keen photographer, wants to spend more time in his darkroom. That was the explanation he gave when he announced his departure on June 19. Others, less kindly, pointed out he had just 11 days to go before his employment contract came up for renewal – and that no new contract had been offered. Unruh’s time at Unisys has been far from smooth, but after almost seven years at the helm of the 40-year-old hardware, software and services company, Unruh says Unisys has finally turned the corner. Last year, following a major restructuring, the company posted its first increase in annual revenues since 1990, up from $6.2bn to $6.37bn. It is not the first time that Unruh has heralded an upturn in Unisys fortunes. After revealing operating profits of $361m for 1992, he told investors: We have successfully turned the company around, only to see profits and revenues slide in 1994. But this time, both investors and analysts are more confident that the company has a viable future.
Mountain of debt
The question is: will it be as one company, or two, or three? There is also speculation that Unisys is on Compaq’s hit list following its take-over of Tandem. They point to the fact that Compaq still has plenty of spare cash – Tandem was a stock deal – and the fact that the two companies are very close. Only last month Compaq expanded the terms of its service agreement with Unisys. Furthermore, Unisys is only valued at around $1.5bn. There is good reason for Unisys low valuation – debt, a mountain of it. The scale of the problem is such that in the first quarter of 1997, payment of interest and dividends to preference shareholders consumed $90.5m of the companys operating income of $106.6m. Net profit was $19.3m, but $30m was then paid to preference shareholders. And that was in a good quarter. In the same period of the previous year, net losses were $13.4m – a loss of $43.6m on common shares. Furthermore, the company is barely scratching its long-term debt mountain. Between the two quarters the company reduced it by a mere $3m to $2.268bn. By contrast, in 1993 following three years of cost-cutting, total debt had been cut to a more manageable $1.1bn – $500m being cut in that year alone. Even this success, fueled largely by cost-cutting, was short lived. Increases in service revenues failed to compensate for declining mainframe revenues and Unisys plunged deeper into debt between 1994 and 1996 while it developed new Intel-based hardware, laid off yet more staff and restructured. In recent times, Unruh’s central strategy has been to formally reposition the company as a services supplier which makes hardware, rather than the other way round. This is a strategy that has won almost universal approval. Martin Hingley, an analyst with IDC, believes the company is moving in the right direction because of its strong reputation of getting things to work. Unisys has never been at the cutting edge of technology but is used by most of the worlds airlines, for example, because of its reputation for reliability, Hingley says. As a result, the company has loyal customers. People who buy from Unisys are those who have bought from Unisys in the past, he says. Unisys challenge over the next few years is to win over new customers. One slightly ambivalent vote of confidence for the direction in which Unruh has taken Unisys comes from Gary Duberstein, the managing director of investment group Green-way Partners. Greenway has a stake of just under 5% in Unisys and has campaigned over the last two years to have the company broken up. I think they are just starting to show some signs of a turnaround, Duberstein now says. Unruh stopped short of formally splitting up the company despite the arguments of Greenway and others that breaking it up would have generated extra value for Unisys shareholders. If the pieces of the company – hardware, software and the computer services – were traded separately, our feeling was that they would trade higher than the whole, argues Duberstein. This proposal garnered the support of 37% of shareholders at Unisys last annual general meeting in April and, Duberstein believes, helped persuade Unruh to go. So is a Unisys spin-off now imminent? For the time being Greenway is holding fire. Right now, we’re most interested in Unisys finding the best possible chief executive to replace Mr Unruh, says Duberstein. What the new chief executive will inherit is a strong range of products, a loyal customer base and a growing software and services business, according to Hingley. For example, the company’s Clearpath server range combines both Intel and Motorola RISC processors, giving it the capability of running legacy applications under emulation as well as on Unix and NT.
Talks broke up
This strategy has kept Unisys users loyal, says Hingley. Analysts at Aberdeen Group back up Hingleys reasoning, writing favorably of the company’s technology in a recent report and concluding that Unisys offers one of the broadest Intel-based Unix and NT product lines available. The first task for Unruh’s successor is obvious – cut debts by bringing in outside investors or re-scheduling. Just months before Unruh resigned, he was trying to do just that, but talks with two investment firms – Thayer Capital Partners and Texas Pacific Group – to take new preference shares in return for a cash injection, broke up without agreement. Alternatively, the new chief executive could consider what Unruh refused to contemplate – a break-up of the company – safe in the knowledge that such a proposal carries considerable support among shareholders. There was an improvement in second quarter results – revenue up 5% to $1.59bn and net profit of $42m. But with earnings of just $14m after payment of preferred dividends a break-up may be the only way ordinary shareholders will ever see a dividend again.
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