Unisys Thinking Lean and Mean : Computers: The company is slashing costs. But to get back on track it must erase $3.8 billion in debt and persuade clients that it will survive.

BLUE BELL, Pa. —  Unisys Corp. was created five years ago through an ambitious computer-industry marriage, a merger aimed at producing a competitor able to challenge even industry giant IBM.

Today, Unisys is a humbler company beaten down by losses, layoffs, the recession and declining market share. Instead of thinking big, Unisys is thinking smaller.

Two weeks ago, the company announced its deepest cutback, a move to return to profitability by eliminating 14% of its employees, trimming product lines and consolidating plants.

Unisys Chairman James Unruh says he is slashing operating costs so far that even if the economy doesn’t pick up this year, the nation’s third-largest computer company can start making money by year-end.

“We have to get ahead of the curve,” Unruh said in an interview last week at Unisys headquarters in suburban Philadelphia, where lush indoor plants and marble-topped counters are artifacts of more optimistic times. “We are engaged in a process to leapfrog back into profitability.”

But Unruh’s bold plan faces several hurdles. Unisys must cut the huge $3.8-billion debt it piled up after its creation by Burroughs Corp.’s 1986 purchase of Sperry Corp. It also needs to reassure nervous customers that it is in business to stay.

Unisys reported a staggering second-quarter loss of $1.3 billion late last month, nearly all of it to cover the restructuring and other writeoffs. The loss followed red ink of $1.1 billion in 1989 and 1990 combined.

The restructuring will cut its work force to 60,000 from 70,000--less than half the number it employed right after the merger. About 13,000 jobs were cut in 1988 and 1989.

Many observers cheered the latest scale-back. Rick Martin, an analyst at Prudential Securities Inc., predicts that it will restore profitability by next year. At that point, the company will start shipping a new generation of mainframe computers, its most profitable product.

Martin said the restructuring eliminated a threat of bankruptcy that existed in the minds of some investors, although Unisys denies it was ever that troubled.

Wall Street greeted the July 23 restructuring announcement by bidding up Unisys stock 50 cents a share to $4.

But other industry watchers say Unisys faces fundamental problems, such as the aura of uncertainty its financial plight has created.

A computer purchase is a long-term commitment. Customers may be reluctant to give their business to any company that may lack the resources to update its technology in the fast-changing industry, experts say.

“They have to convince customers they’re going to be around in a position to support that product,” said Hollis Caswell, who ran Unisys’ mainframe business until he left the company last year.

Said Standard & Poor’s Corp., which last week downgraded Unisys’ debt even further in the junk-bond category: “Unisys’ strained financial condition could continue to impede its ability to compete against financially stronger vendors.”

However, Unisys’ trouble hasn’t deterred some major customers. Kmart Corp. signed an order last week believed to be worth $30 million for 1,500 Unisys computers.

Some industry experts believe that Unisys needs a partner to survive long term. Speculation has even included a Japanese company buying all or part of it.

But although Unisys says it is looking to share technology, and may stop manufacturing some computer lines in favor of buying them from other makers, Unruh wouldn’t comment on any merger plans.

The troubles at Unisys are hardly unique. International Business Machines Corp.’s second-quarter profit plunged 92%, and Digital Equipment Corp. plans about 9,000 layoffs under a $1.1-billion restructuring.

Computer makers are hurt by the recession and a slowdown in the industry’s historic high growth rates. At the same time, customers are demanding computers that can be linked to other brands and use the same software. These machines are less profitable.

But unlike IBM and Digital, Unisys is saddled with $3.8 billion in debt. Interest payments alone ate up $450 million of its precious cash last year.

Unisys also faces strong competition in mainframes. Though predecessor Univac perfected the commercial computer in the early 1950s, IBM--six times Unisys’ size--dominates the mainframe market today.

Unisys has a tough time selling mainframes to customers who have never had one, in addition to keeping its existing customers from defecting when they look to upgrade, analysts say.

In some ways, Unisys is regarded as an also-ran computer maker, out of the spotlight focused on IBM, Digital and younger companies like Apple Computer Inc.

But despite its troubles and downsizing, Unisys remains a large company, and analysts generally praise its products. It has 60,000 customers, including 18 of the world’s 25 largest airlines, 22 of the top 25 U.S. banks and all 50 state governments.

These are among the markets it is targeting in its revamping. In a study, Unisys found that it received 90% of its revenue from 35% of the computer market. That prompted it to narrow its focus to existing customers and to seek new customers primarily in the telephone, financial services, airline and government markets.

Meanwhile, one longtime Unisys manager said employee morale has “hit rock bottom” as workers wait for the pink slips. He said the worst aspect is the uncertainty--whether this will be the last round of cuts.

Unruh said further job cuts will center on “refinements.” But, he added, “One must continue to do a little restructuring every day. The (profit) margins in our business are not going to go up.”

Unisys has been selling assets to trim debt, which it cut by $300 million last year. The largest was the $207 million sale in June of Timeplex Inc., a maker of equipment to link computers and phones in networks.