by David Shabelman
[Posted on January 8, 2008 - 5:12 PM]
E-mail
del.icio.us
Technorati
DiggWith its investment in Unisys Corp. under water, hedge fund MMI Investments LP is pushing the technology services company to either sell or spin off its U.S. government services business.
In a letter sent Monday to Unisys' board of directors, New York-based MMI said it "felt tremendous frustration with the seemingly continuous stream of management, operational and financial missteps" at the company.
Unisys shares, which traded Tuesday at $3.75, have lost roughly 60% of their value since July 2006, when they traded as high as $9.70. The Blue Bell, Pa., company's market capitalization stands at $1.3 billion. MMI spent $247 million to acquire 34.8 million shares, or 9.9%, of Unisys stock, or $7.10 a share. It began purchasing shares in September, when the stock traded at $5.56. MMI did not return a phone call seeking comment.
Unisys in 2005 announced a restructuring plan to reduce its work force and sell nonstrategic areas of its business. At the time, CEO Joseph McGrath said the company wanted to divest businesses that accounted for a combined $500 million in annual revenue to the company, but to date it has sold only its media division, to U.K.-based Atex Group Ltd., for $28 million. When Unisys released third-quarter earnings in October, McGrath said the company was slowing its restructuring efforts, further dampening the stock price.
In a statement, Unisys said it is evaluating MMI's proposal. The company also said it has made "significant progress" improving its profitability by "refocusing its business, reducing costs and divesting noncore assets."
For the first nine months of 2007, Unisys reported a net loss of $92.9 million on revenue of $4.1 billion, compared with a loss of $300 million on revenue of $4.2 billion for the same time period in 2006.
A company spokesman declined further comment.
MMI contends that Unisys shares are undervalued because of what it terms "flaws" in the company's strategic composition, arguing that the best way to improve shareholder value is by spinning off the company's government services business in an initial public offering.
The hedge fund contends that separating the businesses would underline their respective value and boost Unisys shares to between $8 and $12. It urged the company to respond to its proposal by Jan. 23.
Unisys' government unit provides technology services to commercial businesses and governments, including systems integration and consulting, outsourcing and business process management. Its technology segment develops and supports IT infrastructure, including servers, software and mainframes. MMI projects that the unit will generate $1.6 billion in revenue in 2008.
Jamie Friedman, an analyst with Susquehanna Financial Group LLP, agreed that Unisys might benefit from spinning off the government services unit, while noting that it's uncertain if the company will heed MMI's demands. "The public sector practice is pretty healthy and noncyclical, whereas the commercial segment is declining cyclically," he said. "I think Unisys management is more flexible than MMI may be giving them credit for, but Unisys needs to be more urgent."
Friedman said Unisys' chairman, Henry Duques, CEO of electronic commerce and payments company First Data Corp. of Greenwood, Colo., could be a "wild card" in what action the company takes, suggesting that the executive might be more open to divesting assets than McGrath.
