This was an order that Unisys couldn't afford to lose. For more than 20 years, Blue Cross Blue Shield of North Dakota had been a customer of Burroughs Corp., a predecessor of Unisys Corp. On paper, the health insurer was a sure bet to trade up to Unisys' powerful new A19 mainframe, which would let it expand its claims processing, then running on three smaller Unisys machines.
But Blue Cross officials couldn't make up their minds. They had no gripe with the A19's performance or price; they worried about Unisys. In 1991, the Blue Bell (Pa.) computer maker was headed toward a $1.4 billion loss as sales skidded from $10.1 billion to less than $8.7 billion and management took huge write-downs to cover layoffs and cost-cutting. Lenders were getting jittery, as was Blue Cross. "It was very bleak," recalls Darrell Vanyo, vice-president for information services. Reluctantly, he started looking at his options, including an expensive changeover to IBM hardware.
Then, in May, James A. Unruh, Unisys' genial CEO, rode into Fargo. Unruh got on well with fellow North Dakotan Michael Unhjem (pronounced "UN-jem"), the health plan's CEO, perhaps because both were alumni of the state's tiny Jamestown College. But even after Unruh laid out his plans for revitalizing Unisys, Unhjem was hesitant to shell out $5 million for what would be the first A19 sale in the U.S. After much sweat, Unisys got the order in the fall.
ON THE MEND. Now, both Dakotans are breathing easier. Unisys has made money in the past two quarters--the first back-to-back quarters of profit since 1988. Indeed, it's loping toward a modest full-year gain for 1992--perhaps more than $100 million in net profits, analysts project. And in June, Unisys is planning to float a $200 million convertible-note offering, intended to refinance some of its $3.2 billion debt load. Proclaims the CEO: "The turnaround is succeeding. We feel we're on track."
But can it last? Even as customers and investors applaud Unruh's progress, they question his ability to fashion a long-term growth strategy.
By most accounts, the company has done well controlling costs. The severity of its problems forced it to be far more aggressive than IBM or Digital Equipment Corp. in cutting overhead. Since 1988, the company payroll has shrunk 39%, down from 93,000 to an estimated 57,000 by the end of this quarter. In the same period, IBM has cut its payroll 11%. Unisys' overhead is now less than 29% of sales, vs. IBM's 38% and DEC's 32%, helping it boost cash flow and its stock. Since the nadir of Unisys stock at around 3 last year, the share price has tripled, breaking 11 in February before settling at around 9. That's a far cry from the August, 1987, peak of 48 but enough to interest new investors.
Unruh, 51, also has honed the business plan to boost revenue from software and services, which are more profitable than hardware. When Burroughs and Sperry merged, software and services accounted for a paltry 8% of revenues. But by last year, their share had swelled to $1.8 billion, or 21%, just behind mainframe and peripheral sales at $2 billion, or 23% of revenues.
LEANER, HUNGRIER. Hardware operations, meanwhile, have been radically streamlined. Unruh has axed thousands of poor-selling items from the Unisys catalog and closed 7 of 15 factories worldwide in the past 18 months. Soon, Unisys will buy, instead of make, its low-end PCs. Unruh has curbed development for two slow-selling mainframe lines while concentrating on two primary mainframe families--the A series for former Burroughs customers and the 2200s on the Sperry side--and on faster-growing "open systems" based on industry standards such as Unix. So far, though, Unix-related sales account for probably less than 10% of revenues.
Unisys is also refining software and hardware to address tasks in specific industries. For example, it now commands the market in check-processing systems used by banks and insurers. "They're an important partner for us," says Jonathan J. Palmer, chief technology executive at Barnett Banks Inc. in Jacksonville, Fla., which picked Unisys for a $15 million-plus overhaul of its check-handling system. Unisys is also gaining ground among telephone companies, supplying voice-mail systems. One recent customer: New England Telephone & Telegraph.
Unisys is even turning a profit in the generally dismal defense business. It couldn't find a buyer for its $2.1 billion-a-year Paramax weapons-systems subsidiary last fall. Then, it planned a $500 million stock offering to take Paramax public, but canceled the issue because of slack interest on Wall Street.
Now, Unruh is trying to steer Paramax into nonmilitary markets such as air traffic control and weather-tracking. Paramax aims to boost nondefense sales from 20% today to more than 25% by 1995. For now, Unruh says he has no plans to sell the unit. "We're fortunate because we don't build submarines, airplanes, ships, or tanks," says Paramax President Frederick F. Jenny. "We're in the business of information systems."
MATCHMAKING? Unruh, who began his professional life as a financial analyst, gets credit for shoring up Unisys' finances. With some $800 million in cash, he should be able to cover periodic principal payments, such as the $150 million due lenders in September. And prospects are good for rolling over a $1 billion revolving credit line due in January. Debt is still a teeth-rattling 60% of total capital, but that will edge down and could shrink below 40% of capital by yearend 1993, says Rick J. Martin, research director of Chicago Corp., a brokerage firm. Martin, a longtime bull on Unisys, says: "We're going to look at Jim Unruh as having pulled off one of the most significant turnarounds in history."
Still, the long-term picture is quite unclear. Unisys' profits depend primarily on mainframes even as the computer business is quickly becoming dominated by commodity-like desktop machines. Mainframe revenue growth is expected to be flat at best in coming years, and everywhere Unisys turns for new business, competition is brutal and profit margins thin. That, say analysts, could eventually push the company into the hands of a Japanese giant such as Toshiba, Hitachi, or Fujitsu. Already, Mitsui & Co. owns a stake equaling nearly 5% of Unisys.
The smart move now, argues George E. Lindamood, an analyst at consultants Gartner Group, would be for Unruh to find the best deal he can negotiate. Asked if he has shopped the company around, Unruh says: "I could not comment. That's been our standard answer." He points out, however, that Unisys is in the market for strategic partnerships and has already forged deals with chipmakers Intel Corp. and Motorola Inc. If Unisys can manage those partnerships the way it has managed its costs, the turnaround just might stick.