Monday, May. 19, 1986

"I Won't Dance. Don't Ask Me"

By Stephen Koepp.

In the market for large computers there are no sporting rivalries like Coke vs. Pepsi, Hertz vs. Avis, or Heinz vs. Hunt's. It is only IBM against the field. Big Blue controls almost 63% of the worldwide market, while an assortment of relatively puny competitors gets the rest. But one of those companies, Detroit's Burroughs (1985 sales: $5 billion), is determined to acquire one of its fellow underdogs and give Big Blue a run for its data. Burroughs has chosen as its partner-to-be a somewhat larger competitor, Sperry of New York City (fiscal 1986 sales: $5.7 billion). The two companies, which each have about 6% of the market, would together become the world's second largest computer maker. But a rather crucial problem has plagued the courtship from its start almost a year ago: Sperry wants none of it.

Last week Burroughs made a fresh merger proposal, offering $4.1 billion in cash and stock, and once again Sperry's board of directors refused to respond. Burroughs became impatient after two days and took its $70-a-share pitch directly to Sperry stockholders, thus escalating the offer to a hostile bid. Shareholders will have until June 5 to decide whether to sell, but Burroughs hopes Sperry's management will go along peacefully before then. Says Burroughs Chairman W. Michael Blumenthal: "The logic of the merger is so clear that I am hopeful they will realize it too."

Sperry, started in 1933 as a maker of navigational equipment, treasures its independence. But going it alone could become increasingly difficult because of heated competition from Japan and an industry-wide slump in sales. Burroughs, facing the same problems, thinks the merger would allow the two companies to cut expenses by combining their purchasing, research and development, and other departments. More important, the combined bulk of the company could give reassurance to cautious computer buyers, who often prefer IBM simply because it stands so large and secure. Says Michael Geran, who studies the industry for E.F. Hutton: "The merger makes a lot of financial and strategic sense. If this goes through, it could be the start of an acquisition binge" among IBM's smaller rivals.

Other experts see a disastrous pitfall in the incompatibility of the Burroughs and Sperry computer systems. Their main products speak entirely different languages. Declares Joseph Levy, senior vice president of the research firm International Data Corp.: "It's like trying to run a gasoline engine on diesel fuel. Unless they can build a bridge that lets their customers communicate with each other, the marriage will not work."

The merger bid represents a career-end gamble for Blumenthal, 60, who earlier served as chairman of Bendix and as Treasury Secretary under President Carter. His determined advance convinced Wall Street that Sperry's days as an independent company are numbered. In just two days last week, speculators sent Sperry's stock price up $16.25, to $71.25. Some investors think Sperry will find a so-called white knight to deliver it from Blumenthal's clutches, but the company is running out of candidates. During the past year, Sperry is rumored to have held merger talks with ITT, General Dynamics and AT&T, among others. An equally likely possibility is that Burroughs will eventually win Sperry's hand, but only at a sweeter price.

With reporting by Barbara Dolan/Detroit and Thomas McCarroll/New York