United States. Congress. Senate. Committee on the.

The Industrial reorganization act. Hearings, Ninety-third Congress, first session [-Ninety-fourth Congress, first session], on S. 1167 (Volume pt. 7) online

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Online LibraryUnited States. Congress. Senate. Committee on theThe Industrial reorganization act. Hearings, Ninety-third Congress, first session [-Ninety-fourth Congress, first session], on S. 1167 (Volume pt. 7) → online text (page 50 of 140)
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panies, I think, had multiples of between 6 and 10. Were those low
multiples because of inferior management, inferior products, or be-
cause of industry structure?



5370

Mr. Collins. I believe it is because of industry structure, and be-
cause of the performance of those companies, on a revenue and profit
level over the last 10 years, or over the last 5 years, or over the last
15 years that they have been in the industry rather than in inferior
management.

One of the companies that dropped out of the computer systems
market was General Electric, which is typically looked upon as one
of the models of a well-managed company.

And even among the companies in the industry today, Honeywell
has a very successful business in residential controls, in industrial con-
trols, and in a number of other areas that suggest that that manage-
ment is, indeed, capable.

Yet, Honeywell's success in the computer systems industry is some-
what questionable. I tliink you can also say the same thing about
Sperry Rand.

Sperry Rand's other divisions are, on balance, very successful divi-
sions, very profitable divisions, among the most profitable in their re-
spective market areas,

Mr. Chumbris. Would counsel yield on this point ?

You mentioned the fact that General Electric, one of the great com-
panies in America, got out of the computer business.

Then, I think, testimony yesterday or the day before indicated that
there were a few other major companies who were in the computer
business and they got out of it also.

But we haA^e had instances where Kaiser Aluminum tried to get into
the automobile industry, or some other giant corporation, let's say of
the first 500, tried to get into another field but found it wasn't their field
so they moved out.

So examples of giant corporations trying to get into a new in-
dustry don't always necessarily work. I think that is one of the good
things about the American industry system, that if you are a S]~)ecialist
and you know how to run your particular business, you will be top
man.

You can take General Motors, which is the No. 1 corporation, I
guess, and if it tried to get into other fields, maybe it would find that
it would have the same difficulties as some of these large corporations
who have tried to get into the computer industry.

Mr. Collins. I agree absolutely with your statement.

I might make one distinction, and that is that Kaiser tried to get
into the automobile industry not into the transportation industry,
which is a closer analogy.

And General Motors might trv to get into the data processing indus-
try, which is that general name for the industry, as opposed to some in-
dividual market within that industry, one specific market like sys-
tems or like a peripheral subsystems or like applications programs or
like terminal subsystems.

Those are closer analogies to the aluminum analogy.

Mr. Chumbris. I am glad you brought out a different analogy, be-
cause that is one that came close to us. We had some hearings concern-
in.o- tlie automobile industry on S. 1117 this year, and that was brought
out at that time.

Mr. Collins. Thank vou.



5371

Mr. Nash. Mr. Collins, in your judgment what type of minimal
steps do you believe are required, if any, to make the computer in-
dustry more competitive ?

Mr. Collins. Mr. Nash, I have troubled with that question for a
long time, and I have no specific answers. I think a major first step
is recognizing that the industry is the sum of a number of markets and
a number of submarkets, and of allowing the antitrust laws to work
in order to address the industry on that basis.

And if they prove ineffective, then take positive steps to reorganize
the industry to establish separate entities that are addressing those
individual separate businesses.

I believe your suggestion about a GMAC-type of operation, or
about requiring IBISI to sell systems outright to customers, is a good
first pass at possibly solving one of the problems of the industry.

But my difficulty is that there are many problems and they are
very much interrelated, and it is difficult to say we should do this
and that will solve all of our problems.

Perhaps, if some definitive plan is organized, it should be done
in steps to allow the industry to adjust to those various steps as we
move along to establish, eventually, a competitive industry.

Mr. Chumbris. If counsel will yield ? Again we bring up the point
that has troubled us in our other hearings that we have held on this
particular bill.

When you were talking about the GMAC approach, I gather from
your testimony this is speculation as to whether that would be a
good approach or not a good approach.

As a matter of fact, most of the testimony we have received so far
are people speculating as to what would happen if the bill becomes
law, or speculation if the court should take an approach of divestiture.

Indications are that, in the earl}- part of the data processing in-
dustry, if it had not been for the leasing program, that many of
the people would never have entered into the business.

Many of them were highly successful, especially in the earlier
part. Then when you got into the question of whether they should
lease or buy, that is when some of the problems arose.

I think, as we go along, we will have to delve with more testimony,
more facts and figures, statistics, as to the approach of whether
a person should be permitted to buy or to rent.

I think you pointed out it might be bad if there were a law forcing
you to be forced to buy it ; is that right ?

Mr. Collins. Yes; now, I was talking not from the point of view
of the end user being forced to buy. I was talking from the point
of view of suggesting that perhaps it would be good for the industry
if IBINI was forced to sell.

Then to the user, that becomes a decision like any other capital
equipment decision. If he can lease it from a third party then he will
do that. If he wants to pay cash for it he can do that.

INIr. Chuivibris. I was leading into another parallel that we held
hearings on in the middle 1960's. We were discussing the automobile
industry at that time, and the issue there was "make or buy."

In other words, the automobile manufacturer would determine
whether they would make all their parts that go into an automobile or
buy some from another company and make the rest of the car.



5372

I don't remember the exact number, but it seems to me there were
50,000 corporations in the United States that made x)arts that went into
the automobile ; and the automobile manufacturer, rather than make
;them, bought from these 50,000 manufacturers. This might be a
parallel to the unlimited number of small people who are in this data
processing, whether it is in software or peripherals, and who are living
off of this industry, may be because of the procedures that have been in
effect since the industry started in 1955.

I don't know whether that is a good parallel. I am just throwing it
out as an idea. As we continue with our hearing, some witnesses may
touch on that point.

But from what I gather, especially in the Washington area, every
da}' you will read in the financial columns some type of a data process-
ing company, many of them very small, which is making a living off
of this industry.

Washington is loaded with them, because of the fact the Federal
Government is here and many of the head offices of corporations are
located in the Washington area.

Mr. Collins. Could I make a couple of comments?

Mr. CiiUMBRis. Yes.

Mr. Collins. No. 1 : One of the major problems that we have is the
lack of good accurate data about this industry ; and No. 2 : yes ; there
.are many small companies participating in this industry, one- and two-
man programer shops and systems shops.

^ly suggestion is that if this industry is put on a competitive basis
there Avill be far far more of those companies, some of which will bo
of reasonable size, capable of tapping the public capital markets and
growing into very strong and reasonable competitors in this industry.

And that is something that is extremely difficult today.

]Mr. Nash. I'd like to aslc about the market values of the various com-
panies like Honeywell and so forth. If a restructuring of the computer
industries would take place, do you see positive or negative impacts on
the market values of computer industry companies ?

jSIr. Collins. Mr. Nash, that's an almost impossible question to an-
swer unless some definitive restructuring plan is suggested.

]\Ir. Nash. Generalizing that the Justice Department's current think-
ing, as I know it, of establishing IBM's general purposes to assist in
these operations, there were a number of independent conclusions.

Mr. Collins. The Justice Department plan suggests to me that the
current competitors are going to have a difficult time because IBM
would no longer be restricted in it's market share and could aggres-
sively go after the other market shares of the others in the industry.
I think that plan has ominous implications for the rest of tlie general
purchase systems manufacturers. That, of course, is one possibility.
There are many other possibilities.

Mr. Nash. What about the effect of the value of the IBM share-
holder under this hypothetical plan ?

Mr. Collins, Could I first go back to one previous point before
moving on to that ?

Mr. Nash. Sure.

Mr. Collins. Many of the things that are liappening today, simply
raising the question of a possible restructuring of the industry as a
result of the Telex litigation, the Justice Department litigation, these
hearings, are counterproductive from a capital point of view.



5373

They are making that potential investor step away and say he will
wait to see wliat happens ; and the longer it takes for something- to
happen the further behind those companies are going to fall because
capital is simply not available.

The second part of your question was what would be the impact on
IBM's stockliolders of any restructuring. Again, there are so many
possibilities it is difficult to detei-mine.

I would say, in general, that it would be a positive impact; that
the sum of the parts would be valued in excess of what the whole is
valued today.

]\Ir. Nasii. I have no further questions, ]Mr. Chairman.

Senator Hart. ]Mr. Chumbris?

]Mr. Chumbris. Tliank you, Mr. Chairman. I've had my say on this
particular point. Dr. Mike Granfield, the minority economist, "has some
questions he would like to ask.

Senator Hart. JNIr. Granfield ?

Mr. Granfield. Thank you, ]Mr. Chairman. I'm sure my questions
will strike you extremely naive and uninformed. I readily admit that
I'm an economist and we all admit we are relatively naive and unin-
formed.

Let me deal with this problem of capital entry. I'd like to separate
out, perhaps in the discussion here, some of the two components of
that.

"When you talk about a capital barrier entry do you mean the ab-
solute amount of capital that has to be raised ?

Mr. CoLLixs. Yes ; I do.

Mr. Granfield. To an economist this is a very interesting notion,
because it is our feeling that if a firm is earning a competitive rate
of return it can attract sufficient capital to expand and prosper. Would
you agree with that ?

Mr. Collins. Yes ; I would.

Mr. Granfield. Would you then agree with the real problem here
that if any firm has a problem of raising capital it must mean the
investing public perceives it will not earn a competitive rate of return
relative to investments?

Mr. Collins. That is, in general, true.

Mr. Granfield. In general, true, you say.

Mr. Collins. Yes. Expectations must enter that equation.

Mr. Granfield. Absolutely. So the real problem here is the barriers
to enry are not facing that because of the size of the capital barrier
but because the investing public perceives they will not earn a competi-
tive rate of return.

Mr. Collins. It's a combination of the two things. The investor
doesn't know whether or not that company in the future will be able
to realize a competitive rate of return.

If you build and ship $100 million worth of equipment, you can
tell immediately. You know what your production costs are. You
know what your marketing costs are. You can tell whether or not
you were realizing a competitive rate of return.

In a rental-based market it may be 5 or 6 years before you know
whether or not that return will be a reasonable return.

Mr. GRiVNFiELD. You're telling me your risk is higher, the longer
expectation of a rate of return or the longer investment arising
because the uncertainties involve a good deal of risk.

40-92 7 — 7 5 35



5374

Mr. CoLLixs, Absolutely.

Mr. Granfield. Again we come back to the risking investment at
a higher rate of return the investor will demand before he invests his
funds.

You're telling me the computer business is not the size of the capital
barrier ?

It's really inherent, j'ou're telling me, because of the technological
structure of the industr}^ that perhaps there's a high risk involved
so that the investor will demand a higher nominal return than he
would in an industry in which the technology — in any case, you can
start a business in a short amount of time.

Mr. Collins. It is also the absolute size of that barrier.
Mr. Granfield. Could you please explain that ?

]Mr. Collins. I can explain it in the sense that if we're addressing
the industry as a total computer system's industry, that means that
an extremely large amount of capital must be committed to enter
that industry.

If we are addressing the industry as the sum of individual sub-
markets and individual products, a considerably lower amount of
capital must be raised, then, to enter that industry.

So you're absolutely right. That risk element is extremely important,
but the absolute size of that barrier is also an extremely significant
factor.

Mr. Granfield. Are you claiming that the only way to successfully
enter this industry is on a total systems basis ?

Mr. Collins. I'm suggesting that IB^I's actions, in the case of the
plug-compatible peripheral subsystems manufacturei"s, said exactly
that ; yes.

Wall Street seems to be stuck with the paradox of if I invest in a
company in the industry and it is successful, then IB]\I will take steps
to cover that particular submarket or that particular flank.

If, on the other hand, the company is not successful, I had no reason
investing in it in the beginning.

Mr. Granfield. Are all the plug compatibles now at a dreary state
in terms of rate of return ? Let me be more specific. I have a list here
of the CIA members.

Unfortunately all I have is their revenues and I note that some have
actually experienced decrease in total sales for 1970 to 1973 and some
have been flat.

Despite the fact that some are experiencing increases in sales, are
all of them experiencing low earnings performance ?

Mr. Collins. No; not necessarily. The pi-incipal and major factors
in the industry initially— the Telex Corp., Memorex. and California
Computer Products — are ha\ang varying degi^es of problems.

Telex took a writeoff in its fiscal year ended March 31. 1974, that
reduced its stockholders equity to effectively zero. Telex is effectively
out of the business.

Mv. Granfield. Could it be Telex lost its business to other plug
compatibles rather than IBM? I mean, to more successful plug-com-
patible firms ?

Mr. Collins. No. I believe that is a consideration, but I do not
believe that's true, and I believe the evidence suggests that it isn't
true.



5375

Memorex, of course, also lias extreme difRculties from a capital
point of view. California Computer Products is an interesting case
because the company saw what Avas coming and redirected its disk
drive efforts to supplying Univac, supplying Burroughs, and supply-
ing General Automation; and the companv will record probably a
very successful year in the year ending June 80, 1974.

They Avill probably earn about $1.00 a share on revenues of $125
million, and their common stock is selling at aljout $8 a share, and they
cannot raise permanent capital at reasonable terms.

Mr. Gr-vnfield. That's the key thing: reasonable terms.

]Mr. CoLLTxs. Yes.

Mr. Graxfield. They can raise the capital. They can raise the funds
with a bond issue, but the yield on that might be prohibitive.

Mr. Collins. Sure.

Mr. Granfield. I want to make that point quite clear. They can
raise the capital.

Mr. Collins. "Well, yes, it's true; but not necessarily true. The cost
of raising that capital may be counterproductive. It may not be
worth it.

In fact, that's the reality of the industry today. If, in fact, to get
that long-term debt, the company has to put equity sweeteners in there
in terms of common stock and such that through committing that
additional capital over the 2 years, they'll end up being at a place in
current stockholder benefit below where they might be now.

Companies are in the position now where they're saying that be-
cause of the cost of capital, it's not even worth it to expand. We may
as well stay where we are.

Mr, Granfield. I understand many firms today are facing that
problem. It's not unique to plug compatibles. Many firms given the
prime rate, the cost of floating a bond issue, can't afford to expand at
this point of time.

Mr. Collins. That is absolutely true, and I addressed that ques-
tion in my statement to suggest that that is true as a generality, but
in terms of the general purpose computer industry, that there are
unique considerations.

INIr. Granfield. Because they are more competitive than other
industries ?

Mr. Collins. No; not because they are more competitive. Because
that capital barrier. No. 1, is so enormous; No. 2, IBM has suggested
by its past practices that competition on anything but a total systems
basis is impossible; and No. 3. because investors have already lost
tremendous amounts of money in this industry because they did not
understand the nuances of the industiy. The}^ understand now and
they're staying away.

Mr. Granfield. You can perhaps view this as there might be ex-
cesses in the industry. I understand other industries are experienc-
ing severe growing pains. Is that your impression?

INIr. Collins. Yes ; that's true. It happens often.

Mr. Granfield. It happens often that we find excess energy and
the profit isn't there because of vigorous competitive pressures.

INIr. Collins. Absolutely.

Mr. Granfield. It doesn't imply anything wicked or evil going on.
Is that not correct ?



5376

]\[r. Collins. Sure. That's absolutely true. I'm suggesting this is
dilferent.

]Mr. Graxfield. It may be different.

]Mr. Collins. It maye be different.

Mr. Granfield. That's a legal question that has not been litigated
completely. Is that not correct ?

^Nlr. Collins. Well, I

]Mr. Graxfield. Certainly, that remains unanswered.

]Mr. Collins [continuing]. I'm attempting to avoid that legal ques-
tion.

]Mr. Granfield. Let's deal with the financial economic considera-
tions. That question remains unanswered.

]Mr. Collins. I'm sorry. Could you repeat that ?

Mr. Granfield. It's not clear. Is it clear as to why? It might be
because certain answers of IBM; it might be because of competitive
pressures leading out to

Mr. Collins. It's all of those things. You're absolutely correct. But
as I, on a day-to-day basis, talk to people that are potential investors
in this industry and we discuss the reasons why they may or may not
make an investment in the industry, there are two reasons that come
out and come out very loud and clear.

One is the systems lock; the other is the capital barrier; and the
capital barrier would not be so important if IBM did not take full
advantage of it.

JNIr. Grax^^field. As I read my reports from Merrill Lynch and also
Standard. I am fraught with great uncertainty with almost every
major industry I would want to invest in.

I think about petroleum and the allegedly high profits. I don't know
how long they're going to last. I now read in the "Washington Post
that there are excess supplies of petroleum available with the threat
of price controls, et cetera.

I look at the automobile industry. It's related to the energy problem.
That concerns me in terms of earning a normal rate of return.

I look at steel. They're doing very well now. Traditionalh' they
don't. They only have a few good years of prosperity.

What I'm saying is the whole aura of investments today are fraught
with great uncertainty, in part because of inflation, in part because
they feel there's not sufficient capital available on cross industries.

You're saying this industry is more unique than that. But every
industry spokesman says our industry has more profits than anybody
else, and ultimately they turn to Washington for help.

Nonetheless, I see problems across the board because of capital crunch
and constraints.

Mr. Collins. I agree with you completely. The capital market, in
general, in this country, is in bad shape.

Mr. Granfield. The money machines have slowed down.

Mr. Collins. Virtually to a halt in some particular areas.

Mr. Granfield. Let me come to another problem here, and hope-
fully it will be related, at least in my vague mind, to this capital bar-
rier problem.

IBM is a total system.

]Mr. Collins. Total computer systems family.



5377

Mr. Granfield. Control data is basically the liighest technology
industry, scientifically based in computers. Is that correct i

JNIr. Collins. Yes, that's the emphasis.

Mr. Granfield. Is that what Burroughs is, too?

Mr. Collins. No. Burroughs has a product line that is somewhat
similar in the breadth of that product line to the IBM product line.

However, Burroughs has picked out individual product lines, ter-
minal subsj'stems, and lousiness accounting machines markets where
equipment could be sold outright, and they've also concentrated very
heavily on one of their traditional markets and that's the banking-
market, again where a product could be sold outright.

Mr, Granfield. NCR is where? Where are they now? Where are
they concentrating their attentions ?

Mr. Collins. Primarily on the lower end of tliat systems market.

]\Ir. Granfield. Sperry Rand ?

Mr. Collins. Sperry Rand. Almost across the board, with emphasis
on the higher end.

jSIr. Granfield. Honeywell ?

Mr. Collins. Honeywell, virtually across the board.

Mv. Granfield. GE ? Where were they ?

Mr. Collins. GE concentrated on time sharing, a concept that later
became generally accepted within the industry, but they did the pio-
neei'ing in that effort.

The GE and Honeywell product line fit together such that if you
did ask, or if j^ou are going to ask, the Honeywell question, that's what
gave Honeywell that full product line.

Mr. Granfield. AVliere was GE? The kind of machine that was
selling?

Mr. Collins. They were on the low end of the spectrum and on the
very high end.

Mr. GR.VNFIELD. RCA ?

INIr. Collins. RCA was very much medium-to-large systems.

Mr. Granfield. Now, I'd like to review what you told me here. That
was also my very naive impression. NCR is an area where they tradi-
tionally had some comparative advantage, or at least wanting to tie
tlie computers in certain low-level machines. Is that not correct?

INIr. Collins. Yes, that's correct; in the sense they had that office
equipment marketing organization.

Mr. Granfield. Control data organized what I would regard as one
of the finest teams of solid state physicists and electrical engineers
available in the industry; is that not correct?

Mr. CoLiJNS. That's correct.

Mr. Granfield. Were the}^ not founded by a similar gentleman ?

Mr. Collins. Yes.

Mr. Granfield. GE went to the top end of the field because they
received some governmental contracts in developing computers with
respect to municipal guidance systems. Is that not correct ?

Ml-. Collins. I can't verify that. I will accept it.

]Mr. Granfield. Where they had some previous background. With-
out going into the other details of the firms, it seems to be that each one
of these firms has entered the field where the fellow had a technologicnl
comparative advantage or at least could conceivably develop that.

Mr, Collins. That's correct.



537S

Mr. Granfield. From what I understand IBM perceives the field
as a much broader technologically-based field. In reading articles sub-
sequently published by GE, IBM's great insight and genius allegedly
was they saw this as a service-based industry; just as important as
developing good hardware, developing personnel to show the customer
how to effectively use his hardware.



Online LibraryUnited States. Congress. Senate. Committee on theThe Industrial reorganization act. Hearings, Ninety-third Congress, first session [-Ninety-fourth Congress, first session], on S. 1167 (Volume pt. 7) → online text (page 50 of 140)