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

. (page 56 of 140)
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 56 of 140)
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led as the leader in the industry in technological innovation and you
are faced with possibly being restructured or broken up or having
something done to you that you don't really care to have happen, then
you have to take another tack.

And I think that it was sometime in 1971 or 1972 — I can't pinpoint
the date for you — that IBJNl determined that that tack was going to
be teclmological leadership. ' ' "

It clearly did not have it prior to that time.

Mr. Granfield. "Well, it seems like IB]M is going to be damned if
they do and damned if they don't.

Mrs. Walter-Carlsox. "Well, maybe when you get to be that size,
relative to everybody else, that's true.

Mr. GRA>rriELD. Given this forecast — you saw this tremendous tech-
nological breakthrough of IBM — why did you sell IBM stock ? Why
did you recommend to your firm to sell IBM stock?

Mrs. "Walter-Carlsox. "Well, unfortunately, the mutual fund in-
dustry — and my own job, in fact — is really a perform-or-perish kind
of situation and one does not perish if one manages to outperform what
the stock averages are doing. I was under the imj^ression that with
IB^I under legal attack and with at least a possibility that they would
lose the Telex suit, that the stock would not go up ;' that it would go
down. So it was really a simplistic decision that I wanted to retain
the assets that we had under management if possible.

Mr. Graxfield. "Why didn't you sell short 'I

Mrs. "Walter-Carlsox. ]\Iutual funds can't go short or I would have.

Mr. Graxfield. Touche.

One last thing. You said you gave evidence earlier that IBM lagged
behind in a very technical way in which they built their memory units.

Are you aware that they lagged behind in total service cost to cus-
tomers because of changing their information of core knowledge?

Mrs. Walter-Carlsox. That's what I was about to say. They have,
for all practical purposes, a bundled pricing, and you get" lots of things
free. I don't know what their service costs are.

I question whether anvbodv outside of IB^NI knows the answer to
that.

Mr. Graxfield. Well, what I'm saying is that even though you claim
they lag in this teclmology. and of course, now they will soon be the
superman of technology in the field, I Avould expect the customers to
switch to somebody else if they could no longer produce the total
proi'ect, which is more than the technical capability.

For example, when you innovate and take on semiconductor memory
units, if you cannot operate that unit at a certain load of level your
costs are very much higher than previous technolog;\'.

]\rrs. Walter-Carlsox. Semiconductor core, which'

^Ir. Graxfield. You were talking about the way IBM has tradi-
tionally lagged behind some of its competitors in terms of the potential
way they could have built the main-frame units.

Xow, as a computer user, when you change this technology', the
planners of that computer system, we have been led to believe, had



5412

better forecast capacity acutely because downtime on more complex
machines is more costly than on less-complex machines.

Mrs. Walter-Carlson. OK.

Mr. Granfield. When you go to more complex machines, since it is
much more efficient, if you haven't got that increased capacity, or can-
not rent it out, that machine could cost the customer more in the total
sense and maybe that's why their customers didn't have the capacity to
use this new technology efficiently.

Is that not possible ?

Mrs. AValter- Carlson. Well, anything is possible; but I don't thmk
it's really realistic. The customer 'typically knows how many bits of
memory "he can use and he knows what the cost tradeoffs are.

Mr. Granfield. Well, let me indicate an antidote. At UCLA, when
we switched from IBM systems to the 360/91 our computer costs went
considerably up.

The reason was we were using that machine only to 45 percent of its
capacity. Xow, for any program that went through that machine it was
much more efficient in the process than with the prior system we had.

Even though we projected a greater increase in use that was not
forthcoming, our total cost of operating that system was considerably
higher than the prior system we liad, yet for any one program the cost
was much greater with the new equipment.

Mrs. Walter-Carlson. Well, that's exactlv what happened in 1970
when all of the computer companies ran into difficulty.

The problem was that most of the users had too much computer
capacity already on hand.

Mr. Granfield. What I'm saying is that there might be some ration-
ale for IB^M's behavior of serving the customers from a cost-efficiency
view. Thank you, ]Mr. Chairman.

Senator Hart. Thank you very much.

[The following was received for the record :]

MATERIAL RELATING TO THE TESTIMONY OF
MARILYN WALTER-CARLSON

Exhibit 1. — Prepared Statement nf Mr.". Walter-Carlson

Prepared Statement of Marilyn Walter-Carlson. Vice President and Associ-
ate Director, Research Shareholders Management Co., Los Angeles, Calif.

I have been a security analyst for IS years, beginning my career as a research
as.sistant in 1956 at Smith, Barney & Co., a major Wall Street brolierage con-
cern. Ma' initial assignment was coverage of the emerging high technology in-
dustry, "which primarily consisted of IBM, General Electric, Westinghouse, and
the large aerospace companies. The big news in 1956 was the IBM-Justice De-
partment consent decree. Ancillary high teclmology companies emerged, ex-
ploded and expired during the 1959-1964 period, which was an exciting time in
the electronics industry. This period produced today's major semiconductor com-
panies such as Texas instruments. Motorola, and Fairchild Camera and Instru-
ment, and super growth companies in the instrumentation area such as Hewlett
Packard, Perkin-Elmer and Tektronix. Virtually all of these companies were
and still are dependent upon the computer industry in varying degrees.

Ten years later, in 1966. I was asked to follow the emergency, explosion, and
■subsequent expiration of the computer leasing and software companies and the
peripheral equipment companies. :Many investors made large sums of money from
these companies, but that was when venture capital was available and the stock
market was going up. I was involved in research and corporate finance work in
the high technologv area at W. E. Button & Co. from 1966 to 1972 and negotiated
a .sizeable merger "which was consummated in 1969 ($200 million in consolidated
sales ) .



5413

For the past two years I have been on the "other side of the Street" with an
investment advisory firm, Shareholders Management Company, with over $1
billion in assets under management, including six mutual funds, small individual
accounts, and pension fund accounts. I am Vice President and Associate Director
of Research and have responsibility for the analysis of companies operating
within the entire high technology area, including computers, peripheral equip-
ment, software service companies, semiconductors, electronic instruments, and
consumer electronic products. These are all industries which I have researched
intensively in the past, and which I now cover witli the aid of Wall Street ana-
lysts. Since Shai'eholders is a sizeable account for the Wall Street brokerages,
we receive inputs from all major bouses with oral access to their analysts. Be-
cause of the information flow from Wall Street and other sources on the major
companies we do not personally call on those companies, but direct our efforts
to following the small companies which do not receive attention from Wall
Street.

In spite of this policy. I found that I was not getting objective information
from Wall Street during the IBM-Telex trial last year, and devoted 100% of
my time to the reading and analysis of many of the documents which become
part of the public record as a result of that trial. My conclusion led me to rec-
ommend the sale of our IBM holdings approxiznately one year ago at a price of
about $315 per share. That recommendation was followed and our accounts now
have a very small amount of IBM.

]My biography is carried in Who's Who of American Women ; Who's Who in the
West, and Who'« Who in Finance.

The subject matter of my statement to this subcommittee today deals with :

1. The lack of available data on this burgeoning industry, vis a vis, others
such as .steel, autos, and consumer durables.

2. The sheer size of IBM relative to the five other computer companies with
some simple supportive statistical data.

3. The difficulties an institutional investor faces with regard to investing in
companies allied to the technology field.

4. A detailed discussion of the very heart of IBM — its Components Division —
in comparison with the semiconductor industry.

5. Possible effects on the semiconductor and computer industries of a spin-off
of IBM Components and test equipment activities.

PART I. LACK OF INDUSTRY DATA

Perhaps the most illustrative example of the lack of easily available data to
security analysts and manufacturers in the computer industry is a comparison
of the annual reports to stockholders of IBM and General Motors, which was
.selected simply because it is the largest industrial company in the United States.
The IBM report begins with the traditional letter to stockholders, which is three
and one-half columns long and which contains only four paragraphs of operating
statistics, or at mo.st ten sentences of text, less than one sentence per billion dollars
of sales. The body of the report consists of sixteen pages of pictures intersper.<?ed
with brief comments on various people, computer applications, new products,
and new markets. None of this information is useful in either the financial
or product analysis of IBM since it is not specific. The next feature of IBM's
annual report is a financial review less than two columns in length, partly repeat-
ing tlie information given in the letter to stockholders, and then repeating the
figures given in the income statement which is on the facing page. This is fol-
lowed by a very brief balance sheet with no footnotes except for the standard
notation that "the notes on pages 25 through 27 are an integral part of this
statement." The source and application of funds and three pages of brief foot-
notes are followed by a concise ten year summary of operations, a list of the
divisions and their primary focus, and the officers and directors of the company.
It is a terse document designed to conform to the minimum standards for report-
ing required by the Securities and Exchange Connnission and the accounting
profession. It is not in any way helpful in analyzing what occurred in the com-
puter industry during the year.

In summary. IBM. the computer industry leader, provides no industry data
either to its shareholders or to investment analysts in its annual report, a" study
of the 10-K report reveals some additional information, but a paucity of hard
data exists for IBM. and thus for the computer industry as a whole.

In order to illustrate that an industry leader can divulge substantial infor-
mation, I reviewed General Motors' latest annual report. A preliminary black
and white copy is sent to those on the mailing list but is available upon "request



5414

to anyone. This advance copy is 50 pages long, compared with IBM's final report
of 32 pages. GM"s letter to shareholders is two pages long and generally dis-
cusses the environment in which the corporation operated in the previous year.
There is a cautious statement of expectations for the current year. The body of
the report, entitled "The Year in Review" provides a wealth of information in
approximately nine pages of text plus another nine pages of illustrations.
Excerpts include : "GM's 1973 factory sales of cars and trucks in the
United States totaled a record 6.512.000 units. 5.251,000 cars and 1,261,000
trucks * * *. Of all new cars sold in the United States during 1973, including
imports, 45.0% were GM products * * *. In 1973. GM had record sales of com-
mercial nonautomotive products in the United States totaling $1.9 billion, or
14% above the 1972 level * * *. Electromotive Division * * * sales included 40
high-speed 3,000 horsepower passenger locomotives to Amtrak, with 110 similar
units to be delivered in 1974 * * *. Export deliveries of locomotives during 1973
were up 19% * * *. Compare these facts with the most definitive statement in
the IBM letter to shareholders, to wit : "Accompanying a record rate of world-
wide installations in the final quarter of 1973, outright purchases of data process-
ing equipment were also at an all-time high for any quarter, and were higher
for the full year 1973 than for 1972 * * *. Orders for IBM equipment and serv-
ices during 1973 continued strong, and at year end the backlog of orders was
higher than at year end 1972 despite a record level of shipments" * * *.

GM's very detailed review of the prior year's activities is followed by an eight-
page special report on the GM Proving Grounds, a two-page financial review,
footnoted income and balance sheets and six pages of footnotes, including a full
balance sheet for General Motors Acceptance Corporation. The end of the annual
report provides a twenty-year history of operations and includes a ten-year his-
tory of the number of cars, trucks and coaches manufactured in the United States
l.)y brand name, and the number of cars manufactured outside the United States
by country. Expert security analysts who follow GM closely tell me that the
Shareholders Relations Department will provide them with various brochures on
the advances in engines, the latest in pollution control devices, etc. l.i addition,
the GM security analyst contact will provide the number of cars shipped by
division on a ten-day basis to any analyst astute enough to inquire.

The other computer companies all make an effort to inform their shareholders
as to the performance of the several aspects of their businesses. NCR has made
a successful effort to provide information and has used a question and answer
format in place of the traditional letter to stockholders. The questions represent
those most frequently asked of management and the answers are their usual
response. The financial section of the report shows numerically and graphically
the revenue derived in three new product groupings and compares that informa-
tion with what was reported in 1972 in the four former product groupings. Four
bar charts are used to display the number of employees, revenue per employee,
consolidated revenues (broken down between domestic, foreign and totaled),
and equity per common share for five years, with the exact number given for
each entry. The footnotes are descriptive and written in understandable language
for the benefit of the stockholder rather than to satisfy legal requirements. The
ten-year review of operations presents detailed information enabling analysts
to immediately compute significant financial ratios.

Burroughs' annual report describes each product group's experience in the
previous year in some detail. A saparate page in the report discloses product
revenues for each of four classes of products, and under the equipment and
systems classification, discloses the amount of revenue by size of computer :
small application machines, small computer systems and business minicompu-
ters, and large and medium computer systems. A separate bar chart gives the
sales/lease relationship of the equipment and systems revenue for the past five
years. As is the case with NCR, Burroughs' ten year financial summary is very
detailed and helpful. There is very little reason to have to dig into the 10-K
report to better understand the financials of the company.

In the case of Control Data, the annual report is concise and does not give
as much information as security analysts would like to have, but it does divulge
sales performance by group in the letter to stockholders. However, Control Data
follows the practice of mailing the complete 10-K report to security analysts
as soon as it is available (shortly after the annual report is received) ; this is
a very complete docun.ent indeed, both on its own merits and especially in com-
parison with the IBM 10-K.

Sperry Rand's annual report is also complete and includes a table on revenue
and income for its four major product groups for the past five years. Manage-



5415

ment is specific in terms of detailing square footage of plant and number of
employees by product line which aids in analysis of the contribution to profits by
group" in the future. The ten year summary is so inclusive that it should prob-
ably be adopted by the SEC as mandatory for all companies in all industries.

Honeywell, thesecond largest computer company, has not made analysis easy
in the past, but the 1973 annual report does provide significant information on
the revenue stream derived from Honeywell Information Systems, and the
amount of sales and earnings coming from its other businesses. We suspect that
General Electric, the largest single holder of Honeywell as a result of the sale
of its computer operations to Honeywell, might have been instrumental in this
shift, since as long ago as 1960 GE has been presenting a breakdown of its prod-
uct groui)s in the annual report to shareholders.

What is lacking in the IBM report? The company could employ some simple
visual aids such as bar charts or graphs to present data for at least a five year
period. For example, a bar chart showing sales and earnings for domestic and
foreign operations for the past five years would clearly indicate the faster growth
of the overseas operations during this period. Rental and service income and
sales should be reported separately and sales should be broken out between EDP
sales and other sales since IBM also sells other products such as typewriters.
The campany should provide information similar to that presented by Burroughs
as to the breakdown of the various classes of machines shipped and the sales/
lease ratio within those classes. Somewhere in the report management should
at the very least comment on the operations of its various divisions, and ideally,
report revenues and pretax profits for its five major divisions : Oflice Products,
General Systems. Federal Systems, Information Records and Data Processing.
At present, research and development expenditures are available only in the
10-K whereas the other companies display these expenditures prominently some-
where in the annual report.

In many ways the IBM annual report is actually misleading. For instance, the
average shareholder probably looks at the ten year record and sees a constant
uptrend in sales and earnings. If IBM reported the derivation of those sales, the
shareholder would see that EDP sales are ri.sing much more rapidly than rental
and senice income. If IBM reported domestic and foreign revenues and earnings
separately, the shareholder would see that overseas growth has far outpaced
domestic growth. In short, we in the investment community do not believe that
IBM presents its financial information as fairly as it could. The reasons for this
are unknown, but it is apparent that IBM is intent upon keeping the mystique
which it has carefully cultivated for many years.

Other industries have substantial statistical data which is reported on a weekly
and monthly basis by product. The steel indu.stry reports production figures on a
weekly basis, the auto industry reports new car production and sales every ten
days, the consumer electronics industry (radio and television) reports factory
pro<luction. factory sales and dealer sales on a monthly basis, and the home
appliance industry reports factory sales monthly. Until recently, the semicon-
ductor industry, through the auspices of the Electronic Industries Association,
reported monthly orders and monthly .shipments of ."semiconductors by device type.
A trained security analyst uses this data, along with other information, in mak-
ing investment decisions. :Manufacturers use this data to help plan production
schedules which in turn provide a key to the proper level of purchasing activity,
which in turn should reduce the costs of carrying inventories. The data is not only
helpful to competing manufacturers, but to suppliers as well ; if the steel industry
.sees that the auto companies are planning on increasing production, the steel
industry can better gauge its near term demand from this class of customer. If
the semiconductor industry knows that inventories of television sets are at very
high levels, it can surmise that demand for the device types used in the produc-
tion of consumer electronics products will slacken, and thus revise its planned
production schedules for those particular devices.

There is no such data available on the computer industry, with the exception
of the International Data Corporation's census, which is an estimate of the total
number of computers installed. Since IB:m so closely guards its data, none of its
competitors are ^^^lling to release additional industry information. We do not
know the number of various classes of machines shipped monthly, quarterly, or
even annually on a total basis, nor do we know by whom. Of those machines, we
do not know how many were leased, how many were outright sales, and how many
were third party leases. We do not know the configuration of any of those com-
puters, hence, we do not know the sales value or the monthly rental which will
accrue. We do not know if the machines shipped were to new users, whether they



5416

are upgrades resulting in machine i-etirements, or whether they are additions. We
do not know whether the machine retirements, if any, were fully depreciated,
and if not, whether there are sufficient resen-es on the balance sheet to cover
necessary writeoffs. We do not know if these machines are domestic or foreign
installations, nor do we have an indication of which industries are increasing or
decreasing their installations of machines.

This incredible lack of industry information is one of the major barriers to
entry in the computer industry, no reputable financial institution with a fiduciary
responsibility, and acting on the Prudent Man theory, can support a new venture
where there is no market information available. The would-be competitor must
define an area where he has ascertained a possible need for his potential product
which must be either cheaper or technologically superior. He must then locate
that market which, in the case of the computer industry, is probably confined to
users of machines which were purchased outright. That in itself is quite a task,
and creates another barrier to entry because a marketing force is expensive to
build and maintain with no revenue stream.

I believe that an initial step in improving competition in the computer industry.
Such an organization could be established either as a user group which would
report the installation of a class of computer, whether it was purchased or leased,
and the industry classification of the user, or the computer manufacturer who
shipped the machine could report the same information to a central reporting
organization. The establishment of such an organization would serve at least
four primary purposes :

1. Competitors would have access to data which showed which industries were
increasing or decreasing installations.

2. Industry would have hard data detailing trends either toward outright
purchases or toward leasing.

3. Small competitors would be able to service only that portion of the industry
which constitutes their viable market, outright purchases.

4. A major barrier to entry would be eliminated because financial institutions
would have data available indicating market size. Using other trendline data,
growth rates and other variables could be factored into the projections, thereby
enabling the lender to determine the total amount of financing required to build
a viable business.

The minimum data required should include machine class, average monthly
rental, sales value, sale or lease, industry classification of user, domestic or for-
eign installation, and replacement, retirement, or upgrade. Data should be re-
ported on a monthly basis.

PART II. COMPARISOX OF IBM WITH OTHER MAINFRAME MANUFACTURERS

The relative size and strength of IBM compared with the five other mainframe
companies. Sperry Rand (Univac), Honeywell. National Cash Register. Bur-
roughs, and Control Data, is clearly demonstrated by a comparison of financial
information taken from their respective latest annual reports and 10-K reports.



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 56 of 140)