NEC and Unisys Forge Deep Server and Services Alliance

by Timothy Prickett Morgan

When Unisys announced last week that it would be laying off some 3,600 employees--about 10 percent of its workforce--as part of a major restructuring, it hinted that it would be moving some work offshore. Yesterday, we found out where some of that work was going: to Japanese server maker and former rival NEC, which has just signed a broad and deep technology alliance with Unisys to, among other things, create and manufacture a future line of servers based on Intel processors.

The surprise announcement comes as Unisys has been struggling with a bunch of issues, including an investigation by the federal government reported in the Washington Post yesterday into allegations by the Transportation Security Agency, which does security at airports, that Unisys might be over billing on a $1 billion contract, and a negative credit rating from Moody's Investor Service in the wake of last week's restructuring announcement. It has not been an easy week for Unisys, and that is probably why Joe McGrath, Unisys' president and CEO, and Peter Blackmore, president of worldwide sales at Unisys, did not take any questions in the announcement they did yesterday morning with Akinobu Kanasugi, president of NEC. It must be a bit strange to be Blackmore, who is an ex-Digital, ex-Compaq, ex-HP top server guy who was recruited by Unisys after being fired as a fall guy at HP by embattled chairman and CEO, Carly Fiorina, after she didn't make some numbers to please Wall Street. He has seen this collaboration movie quite a number of times, albeit the collaboration was done directly through company takeovers rather than indirectly.

Unisys and NEC have signed a memorandum of understanding, which means the deal isn't quite done yet, to collaborate on just about all aspects of each other's enterprise platforms business. Most importantly, the server designers at Unisys and NEC will begin working immediately on a converged high-end server platform. According to Kanasugi, this future common server platform will incorporate both Intel Xeon and Itanium processor technologies and will scale to 32 processor sockets in a single system image. He said in the conference call that this platform would incorporate technologies from both Unisys ES7000 and NEC Express5800 server platforms. Unisys already has a 32-socket Xeon box, but tops out at 16 Itaniums in a single system image with the ES7000s; NEC can scale to 32 sockets with its Itanium servers. Both companies also have their own mainframes as well--Unisys has its OS2200-based ClearPath Dorado and MCP-based ClearPath Libra mainframes, while NEC has its own i-PX9000 mainframes. The agreement does not include collaboration on these mainframe products, but considering that the Unisys mainframes were already working toward convergence with the ES7000s and Unisys doesn't manufacture its mainframe engines any more (IBM does), it could turn out that eventually NEC ends up making the Unisys mainframe chips and servers.

The common server platform roadmap includes co-development by Unisys and NEC engineers on various systems management and middleware programs as well as on "mainframe compatibility," which was not explained. Unisys does not have an entry X86 or X64 server business any more, but NEC does in Japan. This low-end iron does not appear to be part of the deal. In an effort to comfort Unisys mainframe customers, McGrath said that Unisys would continue to develop the strategically important ClearPath mainframes. But the word on the street is that NEC will make the existing ES7000 servers, the future Wintel and Lintel boxes, and low-end mainframes that run an emulated MCP environment on Windows boxes.

What Unisys will get out of this deal besides lower development and manufacturing costs is the preferred services provider status on all NEC iron outside of Japan, which should help bolster Unisys' server business as the two work together to extend the use of Wintel and Lintel servers. How much this helps Unisys today is unclear, since NEC is apparently hanging on to the break-fix services business inside Japan, where it sells most of its products.

According to Wall Street analyst Gregory Smith at Merrill Lynch, the deal is expected to save Unisys about $50 million in spending on research and development and manufacturing costs by 2007, which doesn't seem like a lot for a $5.8 billion company. Unisys is clearly not doing this just to save $50 million, but because it feels it needs to partner with a much larger company--NEC had sales of $45 billion in its latest fiscal year--to peddle more iron, and more importantly, a lot more software, consulting, and services. NEC and Unisys have identified the security area and the telecommunications market as places they will chase business together, but both companies have strong ties in their respective home government's data processing operations as well. They plan to coordinate an attack on the Chinese market, as well as in North America and South America.

Blackmore said that Unisys and NEC have been working on this deal for three months, and that they hope to close this deal by early 2006.

The very existence of this deal begs the question as to why NEC didn't just buy Unisys, which has an incredibly low market capitalization of $1.5 billion as we go to press. Then again, NEC's own market capitalization is only just under $10 billion after it announced the deal. Both companies are undervalued compared to their revenue streams, and that is because they are not making money. And NEC doesn't have to buy Unisys to get a juicy contract and a co-development partner for future Wintel and Lintel iron. It is a lot cheaper to partner than to acquire.