The mortal danger that high technology companies run when they replace a large part of their equity with a mountain of debt is already rearing its daunting head at Prime Computer Inc only a couple of months after the company collapsed into the arms of its white knight, J H Whitney & Co, which won […]
The mortal danger that high technology companies run when they replace a large part of their equity with a mountain of debt is already rearing its daunting head at Prime Computer Inc only a couple of months after the company collapsed into the arms of its white knight, J H Whitney & Co, which won the bride with the promise of a life of ease on a cushion of junk – but as with so many marriages, the bride soon found that the small print of the contract involved her in slaving her fingers to the bone just to keep the wolf from the door of the bijou home. However it is dressed up, Prime is having to lay off 20% of its workforce, and, reading between the lines will have to cut back on customer support, simply to conserve cash to pay the interest on the debt with which it is now burdened. And what does the future hold? Is there light at the end of the tunnel? It seems that the company’s only real hope will be to do the hard work of persuading its Primos customers that Unix is their future and get them on the right path, only to deliver that customer base to a competitor that strikes with a bid just before all the hard work starts to feed through to the bottom line. Prime is an obvious victim of junk bond finance, but a less obvious but equally exposed one is Unisys Corp. Burroughs Corp took on a mountain of debt when it acquired Sperry Corp, and has still not managed to reduce the mountain by very much. And, Electronic News reports analysts saying, Unisys is laying off some 8,000 people – which will bring the total to 10,000 since the beginning of the year, because, like Prime, it is not generating enough cash to service its debt, and desperately needs to reduce its running costs by $500m by the end of next year. Three manufacturing plants are to go, and marketing divisions are being consolidated. But exacerbating its cash-flow problems as it struggles to meet its interest bills is soaring inventories: the projections for highly leveraged companies always seem to assume that there will be no recession in the 10 years following the buyout or acquisition – but the US computer industry has been on the brink of recession for three years now, and times are getting harder in Europe. A couple of years ago, Unisys chairman Michael Blumenthal was confidently talking of building the company to $20,000m a year by the early 1990s: unless it were to be acquired – and no-one wants those kinds of problems there is no way that Unisys can now get to $20,000m this side of 1995: indeed the company is more likely to start shrinking than to grow.
Unisys has no cash
Rick Martin at Prudential Bache Securities thinks it quite possible that the company will sell one or more of its defence businesses, which account for $2,500m of the company’s annual turnover of just shy opf $10,000m. But that looks something of a forlorn hope right now: defence businesses are a glut on the market these days. His overall view of the company is bleak: Unisys has no cash, he says. The company has made great strides in introducing peripherals commonality to its OS1100 and MCP mainframe product lines, but as those bases continue to decline, the cost of keeping the separate operating systems competitive with IBM’s MVS and DEC’s VMS will have to be spread across fewer and fewer user dollars. The company would be much better off if it could sell one of its mainframe bases, but each is a rapidly wasting asset. And it has run up against a brick wall in its attempts to merge the Sperry DCA Distributed Communications Architecture and BNA Burroughs Network Architecture, an area where commonality was particularly desirable. And in the rush for growth, Convergent Inc was a weak acquisition – a large part of its $400m a year sales were business done with Unisys.