Can Unisys go it alone?

The road to corporate recovery can be a cruel and fickle highway. But this time last year, it was a thoroughfare that the once struggling Unisys seemed to be negotiating with considerable success.

Now the supplier appears to be sitting once more on the hard shoulder of economic fortune, however, its wheels having become spectacularly stuck.

When current chief executive Larry Weinbach took the helm of the old-school mainframe manufacturer four years ago, it was truly in the doldrums. Its market capitalisation had fallen to a low of about $2bn, no one was buying its big iron any longer, and existing customers were drifting off one by one in a client/server direction.

But Weinbach kicked serious ass, refocusing the company to provide end-to-end corporate IT services, putting hardware on the back burner, and canning its PCs and low-end servers altogether.

The results were more spectacular than anyone had dared hope. A year ago, Unisys was valued at around $11bn, with a possible slowdown due to the year 2000 (Y2K) problem the only cloud on the horizon. If not exactly trendy, the old war horse was certainly back on its feet and back in favour with Wall Street for the first time since the salad days of the 1980s.

The mooted Y2K slowdown, however, has hit Unisys hard and the company has been dropping hints about underlying problems for a number of months.

Millenium delays
Late last year, it suggested that corporate customers were delaying purchases of mainframes and services in favour of readying themselves to deal with the Y2K situation.

By spring, the supplier was saying that those same customers had taken longer than expected to sign service contracts around web-enabling their networks. Then in June, it failed to close a number of expected mainframe and software deals and also referred to weak service sales to government and financial customers.

Weinbach sweetened the sour taste of these setbacks by constantly reassuring a frankly credulous investor community that the company was busy revamping itself to prepare for an e-enabled future. And no one seemed inclined to question the situation.

But a particularly poor third quarter, which ended 30 September, finally blew the illusion apart. Unisys saw its profit for the period plummet by 69 per cent to $42.9m, with turnover down nine per cent to $1.87bn. An already battered share price went into freefall. Drastic action was Weinbach's only option, and last week he took it.

He announced that 1500 US employees would be elbowed into early retirement at a cost of $200m. More seriously perhaps, he decided that Unisys would consolidate to focus on selected core markets, and would halve the number of service options it offers to those sectors.

And in a stunning triumph of optimism over reality, Weinbach dressed the measures up in this statement: "As expected, this was a transitional quarter as we continued to evolve our portfolio and skills mix to meet the new requirements of the ebusiness market." So, all's well that ends well.

But critics, who have not been slow in coming forward, claim the company is no more equipped to meet the needs of ebusinesses than it is to fly to the moon. The best it can hope for now, they attest, is to be taken over by a more switched-on organisation and become part of its service portfolio - something that is akin to a slow and painful death.

Independent analyst Richard Holway said: "There are any number of companies that will tell you they are offering e-services, but for the most part it's a load of crap."

Market divisions
But he does believe that Unisys' plight is symptomatic of a wider IT services malaise that is slowly beginning to manifest itself. "There's a two-speed services market at present. On the one hand, you've got Eric the Eel flapping about in the slow lane, and that unfortunately is about 80 per cent of the industry, including Unisys."

On the other hand, the minority fast lane is taken up by those that have spotted the sea change in what customers really want as they try to migrate to a new economy model. "Traditional IT services are dead. Everyone said the market would slow down because of Y2K and bounce back. It hasn't," he argued.

Unisys' communications manager Jill Pearcey refuted the idea that Unisys has been slow to address the demand for e-services, however. "We are working on lots of ebusiness projects with existing customers, the Woolwich for example, to move them to the world of clicks and mortar. Ebusiness is a key part of our strategy," she said.

But Unisys also has various others problems to deal with. For one, unlike many old economy service providers, it still lugs a substantial hardware ball and chain behind it. And because its recovery from previous problems was so marked, its current difficulties have come as a proportionately greater shock.

Clive Longbottom, an analyst with the Quocirca consultancy, believes that Weinbach has not helped matters either. "He has caused people to expect continuous growth, and handled the PR side badly when that didn't happen," he said.

And he too claims that a takeover is the most likely next step for Unisys. "You might expect interest from some services company like Sema or EDS, but they might be put off by the hardware. Compaq is still busy digesting Digital. Hewlett Packard or IBM might be a good fit because of their existing mainframe expertise," he added.

But he does not give any credibility to the current outsider's tip that Deutsche Telekom is also in the frame. "If it wants to make a move into IT services, it will probably look nearer to home, perhaps to Siemens," he explained.

Survival of the fittest
Can Unisys simply absorb the shocks and go it alone, however? "Stranger things have happened, but I fear not," said Longbottom.

Unisys' Pearcey retorted, however: "[Takeover] falls into the realm of speculation, and our policy on speculation is 'no comment'."

But if the company is to thrive once more, independent or otherwise, can Weinbach stay at the helm? Once credited as being the messiah, his credibility is now seriously dented and a dignified exit might be his best option.

Should Unisys ultimately perish, it may well be an early and significant casualty in the switch from an old economy model to a new one. And others are likely to follow suit.

But should it survive, it will be at far greater cost than a few redundancies and a couple of deleted product lines. The worst is almost certainly yet to come.