Control Data To Drop Supercomputer Business, Cut 3,100 Employees
BLOOMINGTON, Minn. (AP) _ Control Data Corp. is hoping the abandonment of its supercomputer subsidiary, a technical success that turned into a financial fiasco, sets the stage for sustained growth after several years of problems.
But observers say the trouble created by the company’s ETA Systems will take some time to ease.
″Putting the cork on it ends the cash drain, but it will take cash to clean up and get out of it. The company doesn’t have much in the way of cash. There’s a real problem there,″ said Martin Knoblowitz, a vice president at Standard & Poor’s Corp. in New York, which said Monday’s announcement could mean a downgrade in Control Data’s credit rating.
About 3,100 jobs will be cut in the restructuring unveiled Monday, and the company expects restructuring charges of $490 million. More than half of the 3,100 job lost will come in Minnesota, Chairman Robert Price said.
Most of the restructuring costs will be taken in the second quarter, Price said. The changes should result in a profitable second half of 1989 and set up sustained growth, he said.
Nonetheless, he called the decision to dump ETA six years after it was formed ″very, very hard and very painful.″
″While ETA was a technological success, it was a very large drain on the company,″ Price said. ″It’s the highest-risk part of a very high-risk industry.″
Supercomputers are designed to handle large quantities of data and operate at extremely high speeds. Among their uses are nuclear weapons design, weather forecasting and oil exploration.
ETA, which employed 800 people, lost $100 million in 1988 and never made money for the company. Since its founding, ETA sold 34 machines ranging in price from $1 million to $20 million, Price said.
Price said the company explored the idea of selling ETA or operating it in a joint venture. But he said the market did not support those options partly because a buyer or partner ″would be taking on a considerable burden.″
He said the company could not obtain financing on its own to continue ETA, which he said had no market momentum.
The shutdown of ETA will cost about $350 million, said John Buckner, Control Data’s chief financial officer. The other charges against earnings will stem from a streamlining of the company’s Cyber mainframe computer business, where staff cuts will be made.
Price said Control Data will only recover a ″modest″ sum from the sale of ETA assets and its licensed technology. Japan and other countries will be considered as potential markets for the technology, but there may be resistance from the U.S. government on a foreign sale, said Frank Ryan, a Control Data spokesman.
The company will now concentrate on mainframe computers, data storage, technical services and information services, such as its Arbitron Ratings Co., Price said.
Control Data stock fell 87 cents a share to $21.50 Monday on the New York York Stock Exchange while the stock of crosstown rival Cray Research Inc. closed up $1 at $54.87 1/2 . Cray dominates the industry but is being challenged by Japanese makers.
″I’d be smiling if I were Cray Research right now,″ said Roger Redmond, an analyst for Minneapolis-based Piper Jaffray & Hopwood Inc.
Redmond said the actions taken by Control Data were necessary, but he said he was surprised by the high estimated cost of the restructuring. He said Monday’s announcement ends rumors that Control Data will sell its mainframe business.
Buckner said Control Data is in the process of negotiating a new lending agreement with its banks. The company received a waiver on its current pact because it could not meet requirements of maintaining profitability and a net worth of $950 million, Buckner said.
Meantime, the banks have agreed to give the company $30 million in credit and allow $105 million in existing letters of credit that already have been tapped to stand.
The last good year financially at Control Data was 1983, when the company posted a profit of $161.7 million. It earned $1.7 million last year and $19.3 million in 1987 and lost a total of $832 million in 1986 and 1985. It also has lost money in its last two quarters, including a $12.8 million loss in the fourth quarter of 1988.