Control Data loses control?

Press, 12 November 1985, Page 30

Control Data loses control?

From the “Economist” London Control Data, always a maverick among American computer makers, is now suffering from the industry’s common complaint, depressed markets. On October 28, it announced a third-quarter loss of SUS22S million (?NZ3B7 million), taking its deficit for the first nine months of the year to SUS 269 million (SNZ463 million) on sales of SUS 3.7 billion (?NZ6 billion). It is asking for better terms on nearly SUS3OO million (SNZSI7 million) of shortterm loans which went into default as profit collapsed earlier this year. A plan to repay the banks with a SUS3OO million issue of bonds and preferred stock was cancelled in mid-Sep-tember. All the firm’s main computer businesses — mainframe computers, data processing services and peripheral equipment like disc drives — are doing badly. The third-quarter loss included a charge of SUSIS3 million (SNZ263 million) for reorganising them. Disc drives are the worst problem. These big computer memory machines account for about 35 per cent of Control Data’s computerrelated sales — and most of the losses. The largest buyers were owners of IBM computers and computer firms that used Control Data disc drives in the systems they built for their own customers.

Things began to go wrong when IBM introduced a powerful new disc drive in 1982. Even IBM had trouble perfecting the technology needed to read magnetic discs at high speeds. Control Data, Memorex (a subsidiary of Burroughs), Storage Technology and other companies that relied on making cheaper, IBM-compat-ible versions were stumped. Control Data scrapped its IBM-compatible disc drives last year, writing off SUSI3O million (SNZ224 million) before tax.

Disc drive sales sagged further when the computer industry went into a sluump late last year. By then Control Data was already falling far behind. Its share of worldwide sales of disc drives to computer makers dropped from over half in 1980 to below a quarter in 1984. It is selling the remaining parts of its mem-ory-peripherals business. It expects to do so at a loss. Control Data has similar problems with computers. Its share of worldwide shipments of mainframe computers last year was 1.5 per cent. Even in supercomputers — which were Control Data’s first product in the 1950 s — the company is now a distant runnerup to Cray Research. By the end of 1984, only 31 Control Data supercomputers had been installed, compared with Cray’s tally of 86. Recognising that it needed help to catch up with Cray, Control Data formed a subsidiary, ETA Systems, in late 1983 to develop a new supercomputer, it hoped to cut its stake from 89 per cent (employees hold the rest) to about 40 per cent. Control Data has yet to find any takers and has probably

pumped about SUSIOO million into the business. As more of Control Data’s products grow old and uncompetitive, the cash flow needed to develop new ones is running dry. The company’s computer-related business made an operating loss of SUS 44 million (SNZ7S million) last year, reducing cash flow from this part of the company to SUSIIB million (?NZ2O3 million) (against SUS3IB million (SNZS4B million) the year before). Last year, Control Data was helped by the net profit of SUS 49 million (SNZB4 million) at Commercial Credit, a financial subsidiary. There was no such help this year, because a Commercial Credit subsidiary lost SUSII million (SNZI9 million) in the Ohio banking panic in March. Mr William Norris, Control Data’s chairman, has failed so far to restore the fortunes of the company he founded. It is having to scramble for money to keep its bankers at bay. Commercial Credit was put up for sale in early 1985, but no buyers were found. The company now says it will sell a third of Commercial Credit’s assets and its profitable ticketron ticket services company. Control Data has reshuffled its top managers twice in the past two years, in the hope of getting a better feel of what the cus-, tomers want. Yet Mr Norris hangs on in businesses like data-processing services that are being knocked out by personal computers. He has also proved reluctant to retrench on a series of investments that have proved more intrepid than profitable. The biggest of these is a computer service for education, nicknamed Plato. Control Data may have invested SUS9OO million (SNZISSI million) in this during the past 20 years and it did not break even until late last year. Other smaller investments have included companies making windmills, selling advice on saving inner cities and growing crops on the tundra. Control Data can no longer afford such excursions. Mr Norris has spent years campaigning against hostile takeovers. Unless he makes deeper cuts in Control Data’s business, stands down or sells out, he may soon tempt the deal makers he despises to launch a raid.