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UNISYS:  CRUNCH FOR THE LAST OF THE BUNCH

Thirty-something years ago, IBM's big rivals in the computer business were five companies that built glass house systems. Burroughs, Univac, NCR, Control Data, and Honeywell were collectively known as the BUNCH.  Unisys, which is Burroughs plus Univac, is still in computing and NCR, while it has spun off Teradata, still has ATM and related systems businesses.  But these days Unisys and NCR are mainly services outfits, not hardware makers.  Moreover, Unisys could be dismantled by a hedge fund that wants some cash.  Ironically, Unisys may have just found a measure of salvation: a path to the forefront of virtualized X64 technology via some Sun iron.

Unisys is in a difficult position.  It has made some choices that will take it completely out of manufacturing.  This is its only realistic reaction to its very modest hardware sales volume.  Unisys has good relations with a number of excellent suppliers, led by NEC.  As a result, Unisys can obtain servers, storage, and other devices that very accurately match the needs of the diverse projects it takes on.  But it also has some new board members who are asking questions about the company's very reasons for existence.  Their attitude must trouble Unisys' managers and big customers .  .  .  even if the most unsettling answers could yield joy and cash for frustrated shareholders.

Because Unisys is no longer a glass household word, it's easy to overlook the company's size and scope.  It has suffered considerable erosion, but Unisys still brings in more than $5 billion a year.  It has around 30,000 employees.  And it has some excellent technology for emulation and virtualization that lets it preserve legacy software with roots in 36-bit and 48-bit systems developed by its antecedents, software that is likely to remain in use for years to come.

One of the best paths into glass house accounts where IBM is the mainframe supplier is via racks of X64 servers.  These servers are used by mainframe shops to feed applications interfaces to end users' desktop machines, process email, and generally perform fast-reflex responsive tasks that can be difficult and more costly to do on IBM's data processing mainframes.  Whenever it has a chance, IBM pushes its mainframe Linux engines as an alternative to racks of non-mainframe servers, but it can't always make its case.  When the arguments are over and the smoke clears, some shops prefer the IBM Integrated Facility for Linux, while others prefer the Intel or AMD boxes offered by Dell, Hewlett-Packard, and others.

At many mainframe sites, Unisys doesn't make it to the Others list, and neither does Sun, whose latest midrange Opteron server Unisys has decided to use in settings where efficient X64 virtualization is paramount.  But, as The Unix Guardian suggested when it covered the Sun-Unisys reseller agreement in June, sometimes a computing product is so special that it fosters a breakthrough.  The Sun X4600, sold by Unisys as the 7405R, could be just such a server.

Basically, for a price starting just above twenty grand, Unisys can deliver a small box with big ambitions, one that uses up to eight quad-core AMD chips that circuit geeks love.  The design yields a machine that can deliver (with a little help from VMware) about 128 virtual Linux, Windows, or Solaris environments.  The virtual servers share up to 256 GB of memory, four fast Ethernet ports, 4 PCI-E plus 2 PCI-X slots and plenty of bandwidth.

There's enough capacity there to make a couple (or even a few) IFLs blush, and those IFLs cost a $125,000 a pop without memory or any I/O channels, making the Sun/Unisys alternative look like a terrific bargain, even if there are some extra operations costs associated with an outboard server.

Unisys adopted the Sun iron just as it said it was handing off manufacturing of the Itanium and Xeon servers it sells as the ES7000 line to its current big box partner, NEC.  This co-development and manufacturing agreement was the result of some soul-searching and cost-cutting by Unisys several years ago, when its server volumes did not justify is own engineering and design for Itanium and X64 servers.  That's why Unisys today is selling Dell and now Sun boxes and will soon be selling what are essentially NEC boxes; but its margins in the mainframe business mean that it can and will continue to create and sell its own ClearPath mainframes, which run the Burroughs and Sperry (Univac) operating systems, MCP and OS2200, and their applications.

One reason Unisys might complicate its hardware business this way would be that it has some business opportunities where the Sun machine is a compelling choice.  If so, this could turn out to be a very good thing for Sun as well as Unisys, not only because Sun will sell more servers, but also because Unisys might become a showcase for the Sun boxes providing centralized support of thin clients.  This could be particularly important in market segments like health care management, where there's a strong case for central management of users' desktops, and an excellent opportunity for Unisys and Sun.

When it comes to thin client support, Sun's Opteron server isn't the only way to go, of course.  Unisys already has some attractive ES7000 servers that can support thin clients, but it's hard to say whether its portfolio of strategies provided exceptional bang for the buck.  Value isn't an issue only on the hardware side of the Unisys business.  Unisys is a services company, and while it's won enough business to keep from fading away it has not been able to do much better than break even.  It needs to find ways to do what is already doing, but more efficiently.  Its current solutions apparently cost about as much to deliver as the customer is willing to pay, and that doesn't leave any profit.  What it comes down to is that the servers Unisys has been selling look like they are just a bit too expensive for some of the deals the company has won.

For the past couple years, as this little financial table show shows, Unisys has struggled to keep its top line from sagging even as its management has said, very clearly, that its large systems business is in a general state of financial decline and that it must boost its (much larger) services business to offset this trend.  Unisys revenue is roughly 85 percent the result of deals structured as services contracts and only 15 percent the result of hardware sales, which the company calls its technology business.

Unisys often looks for business in segments that are related to government activity, including healthcare benefit support and information processing connected with various projects at security agencies and the infrastructure of the military.  Even though Unisys is very big on using Windows to support enterprise scale tasks, some of its most important services deals don't mix well with standard desktop Windows installations, because it's not all that easy to manage Windows clients.  Unisys and Sun are both advocates of thin terminals.  At the moment, Unisys is inclined to favor virtualized and restricted Windows running on thin clients that look a lot like PCs, while Sun likes its Sun Ray terminals.  The difference is not important if the Sun servers sold by Unisys can deliver the required functionality to most any kind of terminal at a low cost per seat.

Sun will of course be using any Unisys experience it can talk about to boost sales of its Opteron boxes outside areas Unisys plans to target.  It will talk up any good results in the technical markets that love Sun and also among the new generation of Internet services companies that don't have the Dell or HP sales departments on their fast dial buttons.  And it could turn out that Sun, selling servers to Unisys today, ends up buying whole chunks of Unisys tomorrow.

While Unisys talks about its hot pursuit of virtualization, one Unisys shareholder, a bigwig in a hedge fund, is involved in another pursuit, the direct pursuit of cash.  Clay Lifflander, who heads MMI Investments, has used his firm's 9.8 percent ownership of Unisys shares to get a seat on the company's board and also to get a seat for a buddy of his, Charles McQuade, who was once chief executive officer of Securities Industries Automation Corp.  These two fellows are going to look for ways to wring a bunch of money out of MMI's investment, and the possibilities include segregating and spinning off the portion of Unisys that does business with Uncle Sam.

Some observers of the company think a spinout of government operations might yield more money than the government group is worth if it remains combined with the rest of Unisys.  These observers include people who contribute to financial blogs.  Because blog is from the Latin for "diminished editorial responsibility", it might be a bit silly to think that what has been posted on any blogs should be given the same weight as comments by analysts at deep pocket Wall Street companies.  Blog postings can be silly, self-serving, and a lot of other things without actually being the least bit smart or correct.  On the other hand, they can be right on target, even if by accident.  There's no way to tell in this case.  What is clear, though, is that Unisys management has been put on notice that the company's directors are becoming concerned about financial performance.  And if they don't do something to get the company out of its horse latitudes, they could be tossed overboard.

As it stands, nobody has said specifically that one or more outfits would like to carve up Unisys and that they would buy the pieces for more than the company's market capitalization.  Currently, Unisys has a market cap in the vicinity of $1.7 billion, or just over a third of its annual turnover.  And it might not be so easy to sell off a large piece of Unisys while leaving the remaining company holding accrued debt.  Unisys has more than $1.7 billion in long-term debt, retirement obligations, and other long-term obligations plus a pile of short-term liabilities that's nearly as high.  In more forgiving times, it might have been possible to wring cash out of a company like Unisys that has some nice contracts, some nice intellectual assets, a long history, and some other tangible and intangible assets.  But that was then and this is now.

Unisys is undoubtedly under a lot of pressure to improve its financial performance, but it is probably not in mortal danger even though times are tough.  Sure, a big error by its board could trash the corporation's net worth, to nobody's benefit.  But right now, Unisys appears to be strong enough to hold out, particularly if it can improve its margins and also if the healthcare management business, in which it is an active player, looks to be poised for growth.  Along the way, Unisys could bring some dough to the bottom line by replacing the technology used to perform ongoing services obligations with more cost-effective alternatives, if it can do this without insulting NEC or any of its other key partners.

It might be difficult for outsiders to believe that Unisys can meet the challenges coming at it from inside and outside its gates.  But as the last mainframe survivor of the old BUNCH, it has shown that it has considerable resiliency.  The writers of corporate obituaries are undoubtedly keeping their files up do date, but so, too, are those who still have faith in a $5 billion a year company with roots in computing that are as deep as IBM's.

— Hesh Wiener August 2008


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