Unisys' Troubling Transformation

The venerable company has impressed Wall Street, and wants to jettison its defense business, but can it compete in the crowded consulting market?

BOSTON -- When Unisys Corp. said last week it wanted to sell its $1.5 billion defense business, few were surprised. This was the company, after all, that in 1991 dubbed that part of the business Paramax in a failed effort to spin it off to investors. Now, with defense mergers all the rage, it would seem logical to try again.

But the proposed sale of the defense business also raises bigger questions about the overall fitness of Unisys -- and whether or not it has a viable survival strategy in the ultra-competitive information technology marketplace.

Conventional wisdom has long held that Unisys was one of the first of the old computer powerhouses to embrace drastic cost-cutting and strategic revamping measures. Its turn toward services and software -- now more than 30 percent of the overall business -- has earned numerous plaudits. And while companies such as DEC and IBM have taken repeated drubbings on Wall Street and in the press for poor performance, Unisys, at least in the last couple of years, has been given the benefit of the doubt.

But a closer look at the firm's past promises and present performance suggests it may be far from clear of the same dilemmas that bankrupted Wang Laboratories and caused DEC and IBM to lose more money than the GNP of medium-sized nations.Amidst all the cost-cutting and head-lopping -- the firm axed nearly two-thirds its workforce since the mid-1980s -- Unisys has failed to make sales grow again, and it needs cash to underwrite a massive push into consulting and systems integration.

"They are in much worse shape than when I looked at them in depth in September 1993," said Miles Prescott, an analyst with the market research firm Renaissance Group International.

Revenue has declined steadily since 1990 -- from $10.1 billion that year to $7.7 billion in 1993. Profits have been up in recent years, which helped the company's stock price. But that is largely because Unisys shed costs faster than it lost sales. Since 1989, the number of employees in manufacturing was cut from 25,000 to 9,000. Selling the defense electronics business would accelerate that trend, and raise the question: when do reductions begin to eat away at Unisys' ability to produce state-of-the-art technology and sell related services?

Sales figures across key lines of business paint of a picture of decline. From 1991 to 1993, sales of large computer systems and servers declined 19 percent. Maintenance revenue fell 21 percent over the same period, while defense dropped 17 percent.

But most disturbing is a 38 percent drop in sales of the company's departmental servers and systems, commonly called "client-server." The only bright spots have been in software, consulting and systems integration: a 20 percent growth in software from 1991 to 1993, and 39 percent growth in services.

Unisys Chief Executive James Unruh gave analysts and reporters an update last week at the Ritz-Carlton Hotel in Boston, trotting out the firm's senior executive team. Unruh's key strategist is Victor Millar, a founder of Andersen Consulting, who joined Unisys in 1992.

In the four years since Unruh took the helm, the company has squeezed almost every last drop of inefficiency out of operations. But sooner or later, it must make profits by building new businesses, rather than exiting old ones. Moreover, services tend to generate lower profit margins than hardware -- a point Unisys CFO George Robson acknowledges could lower profits in 1994.

Unruh noted that the company took a $1.2 billion restructuring charge in the first quarter of 1991 -- and it has since racked up another $9 billion in restructuring charges. Unisys seems to be following IBM's lead -- using the sale of defense-related assets to finance commercial services. Big Blue got out of the government information services business and sold its Federal Systems unit to Loral for $1.6 billion. That sales price -- nearly double some expectations -- no doubt heartened Unruh in his attempt to shed similar business. But it isn't clear what Unisys will sell. Its defense business contains much in project management and consulting that fits in with the company's commercial consulting focus, especially given government's move to act more like commercial service organizations. Unruh refuses to comment on the defense business.

Meanwhile, the company continues to send mixed messages. In the beginning of 1994 Unisys revamped its entire government business -- civilian and defense -- under the management of its Government Systems Group, headed by Albert Zettlemoyer.

In a meeting with investment analysts in March 1994, Unruh cited the importance of the group, noting that it would "team with our commercial units ...to apply its expertise...to new commercial business." Now, Unruh appears to have changed gears. It is perhaps no coincidence the senior management team introduced last week in Boston did not include any Government Systems executives. The firm's four major market segments are custom defense systems, the public sector (mostly state and local), telecommunications and financial services.

Trouble is, Unisys is entering a very crowded field. EDS, CSC, McKinsey, Andersen, IBM, Booz-Allen & Hamilton, and Coopers & Lybrand are already plying every market Unisys is attacking. And like IBM, Unisys faces the criticism that it's in the consulting business just to sell more Unisys hardware.

There are also questions about Millar's ability to help Unruh transform the firm. Though he is widely credited with building Andersen's business, he has never transformed one of the world's largest computer companies into one of its biggest consulting shops.With huge costs tied up in manufacturing increasingly passe computers, Unisys faces two options. It could revamp its manufacturing and research operations to produce new kinds of computers -- a tactic taken by DEC, which has bet its future on the Alpha computer chip and PCs. Or it could gradually write itself off as a manufacturer, and turn to its 50,000 customers to offer consulting services. The firm is still paying for a 1986 strategic blunder, when the venerable Sperry and Burroughs companies were merged to form the $10 billion Unisys. At the time, the firm boldly predicted it would be a $20 billion company by the mid-1990s, and it piled up mountains of debt to complete the merger.

But combining the two computer lines turned out to be tougher than expected, and servicing debt restricted the pursuit of new product areas.

All of this happened just as the forces of change were gathering in the computer industry. So just as Unisys should have been catching the next wave of the computer revolution, its attention was diverted toward combining two dying lines of business and servicing debt. From 1989 to 1991, Unisys lost more than $2 billion, and many expected it to file for bankruptcy protection.

Still, Unisys is on track to do 50 percent of its business in software and services by 2000. And, for the time being at least, the company continues to maintain profitability. In 1993, the firm reduced debt to $1.1 billion -- down from $4 billion in 1989 -- and exited with $950 million in cash.

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