Challenging the Jolly Gray Giant

What do Kareem Abdul Jabbar, George Meany, Pablo Picasso and IBM have in common? Answer: their tendency to dominate their fields. And none is more dominant than IBM. The Jolly Gray Giant, as irreverent competitors call it, accounted for almost two-thirds of global computer revenues in 1971, and has been folding, bending and mutilating its rivals for years. Since 1970, two of the world's very biggest corporations, General Electric and RCA, have dropped out of computer manufacturing, each having lost more than $100 million to learn that IBM is hard to buck. But one gutsy company has hit the giant headon, sharply increased its own computer sales and firmly entrenched itself as No. 2 in the industry. The company is Minneapolis-based Honeywell.

In 1970, Honeywell Chairman James Binger announced that the firm would buy G.E.'s sagging computer division for notes and stock worth about $500 million. Honeywell got G.E. plants in the U.S. and abroad, including the profitless French subsidiary, Machines Bull. The acquisition doubled Honeywell's annual revenues (to $2 billion in 1971) and propelled it past Burroughs, Sperry Rand and NCR in worldwide computer shipments. By adding G.E.'s large and small computers to its own line of middle-sized models, Honeywell became the only firm competing with IBM in all three categories. Still, Wall Street analysts figured that the acquisition of .G.E.'s computer operations would dilute Honeywell's earnings. The company's stock dropped 26 points within two days after the announcement, to 78.

Fifteen months later, Honeywell's purchase has proved to be a boon. The combined computer operation, called Honeywell Information Systems, is expected to earn more in 1971 than combined earnings for the two divisions before the marriage. Machines Bull, which had produced nothing but headaches for G.E., has just earned its first profit since G.E. bought it in 1964. Honeywell engineers and salesmen have turned G.E.'s unexceptional Model 600 computer into a marketing success; Honeywell has taken orders for at least 135 of the machines, now called the Model 6000.

Critical Mass. As the U.S. computer market softened along with the rest of the economy, and larger firms foundered, how has Honeywell prospered? For one thing, the new operation is better balanced than its two components were. The bulk of Honeywell's sales have been in the U.S., but G.E.'s business was concentrated overseas, where computer sales have been rising smartly. For another, Honeywell's marketing force is exceptionally strong; it has more computer marketing personnel than either RCA or G.E. did.

When asked why Honeywell made the risky purchase, company executives have a two-word answer: "Critical mass." They define that as the point at which Honeywell's computer business can generate enough profits to finance research and marketing efforts that will allow it to keep up with IBM. With only 5% of the data-processing market before picking up G.E.'s division, they say, Honeywell could never have reached that point. Now Honeywell has 8% or 10%. "We had to seek a dramatically larger share of the general market," explains Honeywell President Stephen Keating, an urbane Minnesotan and former FBI agent. "We knew that it would have been impossible to do it from within. That not only would have increased the risks in case of a mistake, but also would have imposed a severe financial load on our current business and would have depressed profits."

Giant Spur. A crucial test will come within the next four or five years. Binger and Keating plan to introduce Honeywell's first full post-acquisition line of advanced computers. They must be able to function well alongside the 35 other lines of Honeywell and G.E. computers already in the hands of customers. Spurred by competition from Honeywell and from small manufacturers of cut-price computer accessories, IBM has been introducing new models and lowering prices. In the face of such obstacles, Honeywell executives are not saying how long it will take to attain critical mass, but Wall Street considers it a reasonable goal. The company's stock closed last week at 132, not far from an alltime high.

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