New Burroughs try for Sperry: more for bullets than bytes?
When you're stalking an elephant -- a Big Blue one -- there are advantages to hunting as a team. Anyway, that is Burroughs Corporation's stated motive in trying to merge with rival Sperry Corporation. The aim of Burroughs chief W. Michael Blumenthal is to unite the two smaller mainframe computermakers to go after market-leading IBM.
Sperry's lack of enthusiasm about the deal hasn't slowed Burroughs. In the biggest takeover play of the year, the Detroit-based computermaker is pursuing Sperry shareholders with a $70-a-share cash offer for about 55 percent of the outstanding shares. The rest of the shares would be acquired for a package of securities. The total deal is valued at $4.1 billion.
Still, some Wall Street analysts say the merger makes so little strategic sense that Burroughs must have something else in mind.
``The Burroughs and Sperry computer lines are completely incompatible in terms of hardware, software, support, and servicing -- you name it,'' says H. Donald Haback, an analyst at Smith Barney, Harris Upham & Co. ``IBM should not be concerned. If you mix apples and oranges, you still have apples and oranges.''
On the face of it, the two appear to have some complementary strengths. Burroughs's prime markets are in the financial, insurance, and health-care industries. Sperry's are transportation, utilities, and government. Overseas, Burroughs's footholds are in France, Britain, and Brazil. Sperry excels in Scandinavia, West Germany, and Italy.
``But the Sperry sales force is not familiar with Burroughs products, and vice versa,'' Mr. Haback says. ``The computer user's first decision is IBM or not. If not, then they all compete with one another. Sperry and Burroughs sales forces will be selling against each other.''
OK. What is Burroughs after?
``Sperry's electronic systems division, that's what,'' Haback replies.
Specifically, the defense and aerospace segments -- which have become a focal point of management growth efforts. Some 40 percent of Sperry's $5.74 billion in fiscal 1986 revenues (ending March 31) came out of this area. And the division has the potential for exceptional growth if the Strategic Defense Initiative (``star wars'') program gets rolling.
``Star wars represents a major government spending initiative, and with his background Blumenthal sees the potential,'' says Haback. Before piloting Burroughs, Blumenthal headed Bendix Corporation and was secretary of the Treasury under President Carter.
Sperry defense contracts now include long-term hardware, software, and navigation systems for Trident and Poseidon submarines and a $1 billion electronic and combat systems program for Canadian patrol frigates. A leader in flight control systems, Sperry has contracts with both defense and commercial aircraft manufacturers. ``And you know what kind of a year Boeing is having,'' one analyst says.
Yet this has not been a sterling year for Sperry's electronics division. Profit margins were shaved by heavy start-up expenses related to some defense contracts and a strike at one plant. ``Their problems are now behind them; at some time in the near future margins will improve,'' says Michael Geran, a computer-industry analyst at E. F. Hutton & Co.
Mr. Geran agrees that Blumenthal probably regards the defense business as Sperry's ``crown jewel.'' And he says there are product and cultural differences that would make integrating the two companies difficult. But unlike Haback at Smith Barney, Geran says the computer business linkup also makes sense.
``There are some inherent economies of scale in a $10 billion company vs. a $5 billion company that will help improve margins,'' he says.
A combined, larger research-and-development budget would quicken the pace of new product releases. The merged company would need only one expensive design facility for integrated circuits (each now has one). Geran cites savings through combined branch offices, inventory storage, and field servicing.
Burroughs made a bid for Sperry last June, but no cash was behind the offer and it flopped. This time, Burroughs has a reported $3 billion line of credit. Sperry president Joseph J. Kroger has stated he intends to keep the company independent. But apart from a surprise ``white knight'' rescue, analysts don't give Sperry much chance of escaping the Burroughs takeover.
Sperry stock has been trading around $73 a share, up 18 points since early last week. By now, traders say, arbitrageurs probably have most of the 60 percent of the outstanding shares owned by institutions. Haback at Smith Barney is counseling investors to follow the institutions: ``Sell. Take the money and run. If this deal doesn't go through, Sperry will probably drop back to $55.''