Wang Is Running Out Of Running Room

Barnstorming the country to show off a new product this spring, Wang CEO Richard W. Miller asked customers to forget much of his troubled company's recent history: turnarounds that never materialized, delayed products, and huge financial losses in four of the past five years. Instead, he promised them a company free of troubles--a "new Wang."

If only it were so. As if a brutal recession wasn't enough, crucial missteps by Miller helped extinguish all but the faintest hopes of keeping Wang Laboratories Inc. intact. According to quarterly financial reports for the Lowell (Mass.) minicomputer maker, cash flow turned negative last fall, short-term debt is mounting, and by last March, asset sales had already slashed the $1.9 billion company's net worth to just $48 million. The company would not comment for this story or, specifically, on its current financial position. But the analysts who follow Wang are uniformly negative. "The company has not been able to stem the tide of continued operating losses," says Moody's Investors Service Inc. bond analyst Byron Walker. "They're running out of alternatives."

Indeed. Wall Street analysts expect a $10 million operating loss in the fiscal fourth quarter, ended June 30, before including a $40 million charge for layoffs and restructuring. The operating loss for the full year is expected to be $32 million, compared with a $378 million loss in fiscal 1991. Although the losses have narrowed, Wang executives have begun to consider a distasteful option: breaking the company into pieces. Current and former employees say the company's board of directors began in late June to debate the sale of Wang's computer service business, which has annual revenues of $800 million and is Wang's chief source of cash flow.

SWIFT EROSION. Barring a quick sale of that business, Wang's cash position could turn critical as early as September, reckons analyst Walker. Its $175 million in reserves at the end of March is being eroded by the June quarter's operating losses, employee severance, and costs for closed buildings. What's more, the latest financial reports showed Wang with $28 million in outstanding loans that could be called if the company's net worth falls below a negative $25 million. And Wang must ante up $35 million for another loan due to Rabobank Group in the Netherlands in December. Mutual-fund giant Fidelity Investments, once one of Wang's more important institutional investors with 4.2 million shares, isn't waiting to find out. It said it recently bailed out of the stock, which is trading at around 3 1/4, close to its all-time low of 2 in late 1990.

The picture was a lot different in the early 1980s. Then, Wang was a thriving success story overseen by the late An Wang, a Chinese immigrant who founded the company in 1951 and built it into a $3 billion word processing and minicomputer dynamo by 1988. But industry-standard PCs savaged the company's proprietary word processing systems, and poor management by Wang's chosen successor, his son Frederick A. Wang, didn't help.

LOST CHANCE. Enter Miller, a highly regarded turnaround specialist who cut his teeth on the Penn Central bankruptcy in 1970. As an executive at General Electric Co., he was fresh from running GE's TV operations when Wang beckoned in 1989. Though he had no previous experience in the computer industry, Miller was given a $1 million-a-year salary to save the company. His first move was to retire all of Wang's $575 million in bank debt through rapid-fire asset sales. He also revamped a notoriously bad order-tracking system, earning Miller the admiration of customers such as Hugh V. Naughton, director of information systems at Gas Research Institute. Naughton says: "He's one of the best things that ever happened to Wang."

So why hasn't Miller's high-profile turnaround shown better results? Clearly, the recession hasn't helped. And Miller's sheer inexperience with computers led to several wrong turns. For instance, he pressed for the development of a new line of "open" minicomputers, based on industry-standard Unix software, while at the same time promising customers continued investment in Wang's proprietary VS minis. Customers who lived through recurring research and development setbacks at Wang worried that the company would be unable to handle two major programs at once. By the time Miller scrapped the open-systems project, he had wasted precious goodwill. "Wang didn't seem to know what it wanted its role to be," says Lehman Brothers Senior Vice-PresidentHelen van Eeden, who led a now-disbanded group of Wang customers.

Critics say Miller also took his time addressing shortcomings in product development. "He thought he could tweak the organization, and it would be fine," says a former marketing executive, who asked not to be named. "The real problem was a lack of technology to sell." Indeed, Miller waited more than two years before he brought in a new R&D chief, Donald Casey, from Lotus Development Corp.

DEVILISH DEAL. Eventually, the lack of significant new products forced Wang into a Faustian bargain with its biggest rival. A year ago, Miller agreed to resell IBM AS/400 minicomputers in exchange for an immediate $25 million in cash and potential sales commissions of up to $75 million. The deal's drawbacks are now becoming clear. Wang's VS mini customers are switching to IBM gear in alarming numbers. According to a recent survey by market researcher Computer Intelligence Corp., 50% of Wang customers' future purchase plans include the AS/400, up from 7% last September. Wang wins commissions on the sales of IBMs, all right. But it gets no service revenues on the AS/400s, as it would have if the sales had been of its own computers.

It's not clear what options Miller has beyond asset sales if things don't pick up soon (table). Through a spokesman, he and other Wang executives declined comment until after fiscal year results are released the last week in July or the first week in August. But Miller conceded in a recent interview with Financial World magazine that he vastly underestimated the company's troubles. Where he initially thought just 20% of Wang needed mending, he says in the article, in fact an 80% overhaul was necessary.

Miller may gain some breathing space from a court ruling issued June 15. The decision permits the company to charge full price for basic software when customers upgrade their Wang computer or buy a used one. Previously, only new customers paid full price. As a result, the company dashed off invoices to hundreds of customers on the last day of its June quarter, demanding up to $100,000 in new software fees from each.

Barring a windfall from such fees, Wang faces a possibly desperate cash crunch with the arrival of the traditionally slow summer quarter ending in September. By then, the "new Wang" that Miller once envisioned could be a pale shadow of its already-shrunken self.

      Business              Estimated value   Problems
      SERVICE BUSINESS       $650 million     Critical source of
                                              operating cash
      TAIWANESE FACTORY      $150 million*    In legal tussle
      PC BUSINESS            $150 million     Few potential buyers
      in weak market
      *Value of Wang's 70% share
      DATA: BW
Before it's here, it's on the Bloomberg Terminal.