Amdahl Corporation

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Amdahl Corporation

1250 East Arques Avenue
Sunnyvale, California 94088
U.S.A.
(408) 746-6000
Fax: (408) 746-6468

Public Company
Incorporated: 1970
Employees: 8,700
Sales: $2.10 billion
Stock Exchanges: American London

Amdahl Corporation is a leading manufacturer of large-scale data-processing systems. In addition it produces data-storage subsystems, data-communications products, and software, and has an extensive educational service. Competing with International Business Machines (IBM), the world’s leading manufacturer of large-scale computers, Amdahl has carved out its own niche. Although Amdahl’s fortunes have changed in this volatile market, it remains strong, competitive, and innovative. Amdahl’s customers include private and public corporations, financial institutions, governmental bodies, universities, and research foundations located throughout the world.

Amdahl Corporation was founded on October 19, 1970, in Sunnyvale, California, by Gene M. Amdahl, who was at the time a leading computer designer. Amdahl designed his first computer while doing graduate work at the University of Wisconsin. He had left South Dakota, where he was born in 1922, to pursue his doctorate in theoretical physics. With a knowledge of electronics gained in the navy, and a brief computer-programming course, Amdahl designed and helped construct an early computer known as WISC (Wisconsin Integrally Synchronized Computer).

Joining IBM in 1952, Amdahl became chief designer of the IBM 704 computer, released in 1954. In 1955 Amdahl and other systems designers began conceptualizing a new computer for IBM, which they christened the Datatron. IBM’s Stretch, also known as the IBM 7030, was an outgrowth of the Datatron, which utilized the new transistor technology. The name Stretch, not an acronym, stood for “stretching the limits of computer technology development.” Although a financial failure for IBM, Stretch was the precursor to the successful IBM System 360. Meanwhile, in 1956, Amdahl, unhappy at IBM after having been removed as head of a project, decided to leave the company. He worked at two other high-technology firms during his absence from IBM. Returning to IBM in 1960, Amdahl became principal architect for the phenomenally successful System 360, introduced in 1964.

Appointed as an IBM fellow, Amdahl was free to pursue his own research projects. In early 1969, while director of IBM’s Advanced Computing Systems Laboratory in Menlo Park, California, he began to investigate the company’s cost-pricing cycle as it applied to the large computer they were developing. His team concluded that to make this computer pay for itself, IBM would also have to market two scaled-down versions of this advanced technology. After IBM management insisted that Amdahl stay with the original plan to create only one large processor, he recommended they shut down the laboratory, which they did in spring 1969.

Over the next few months, Amdahl reviewed the policies that prevented IBM from aiming at the high end of computer-line development. He presented his analysis to IBM’s three top executives. Although they agreed with this analysis, they said it would not be in IBM’s best interests to change company policies. Amdahl decided to strike out on his own.

Amdahl submitted his resignation to IBM in September 1970 and founded Amdahl Corporation just a few weeks later. He took no technical personnel from IBM when he left; Amdahl was joined only by young financial specialist Ray Williams and two secretaries. Amdahl and Williams determined they would need between $33 million and $44 million to see a product to completion. In fact, it took $47.5 million. They picked a difficult year for raising money. By 1970 new capital-gains taxes and an advancing recession made venture capital scarce. At first Amdahl and Williams took their business plan to investment bankers, who felt Amdahl Corporation could not effectively challenge IBM. They received $2 million from Heizer Corporation, venture capitalists in Chicago, the day after expending the founders’ investment. Amdahl Corporation was on its way.

At the same time, three other young California computer companies—MASCOR—Multiple Access Systems Corporation, started by staff who left IBM after the closing of the Advanced Computing Systems Laboratory—Berkeley Computers, and Gemini Computers—had gone bankrupt. Many of their people went on to Amdahl Corporation to form an impressive technical team.

During Amdahl Corporation’s first eight months, it continued the search for more capital. The needed funds came from Fujitsu, a leading Japanese computer manufacturer who suggested a joint development program and licensing under Amdahl’s patents. This 1971 agreement was accompanied by the $5 million investment Amdahl needed to complete its second phase of development.

In 1972 Nixdorf Computers, a leading German computer manufacturer, agreed to invest $6 million if Nixdorf could represent Amdahl in Europe. At last, money began to flow in. Fujitsu increased its investment, and some U.S. investors appeared. Amdahl amassed $20 million to build a prototype computer and a production facility.

Amdahl Corporation decided to offer stock publicly in early 1973, but could not find an underwriter, then experienced delays with the Securities and Exchange Commission until 1974, during which time the stock market had declined. At this point, Amdahl returned to the private market.

IBM’s announcement in 1972 of the 370—its first computer with virtual memory—forced Amdahl to scrap its initial computer design. Underestimating the demand for a computer with this flexible, advanced memory technology, Amdahl had been developing a computer like the IBM 370, but without virtual memory.

In August 1974 Eugene R. White, a vice president at Fair-child Camera and Instrument Corporation who had 11 years of management experience with General Electric Corporation, was appointed president of Amdahl Corporation. White effected changes that helped save the company. He laid off almost half the employees, and concentrated on marketing and field support services. He was also instrumental in negotiations with Fujitsu and Heizer to get the funding necessary to complete the company’s first product.

In June 1975, Amdahl shipped its first computer, the Amdahl 470 V/6, to NASA’s Goddard Spaceflight Center in New York. The computer competed directly with IBM’s System 370 Model 168. This success was followed by sales to the University of Michigan, Texas A & M University, and the University of Alberta. Massachusetts Mutual Life, Amdahl’s first commercial customer, chose Amdahl’s 470 V/6 over the IBM 370 when IBM raised its prices and delayed delivery. Other customers followed Massachusetts Mutual Life, among them, AT&T.

Determined to best IBM, Amdahl was the first truly plug-compatible manufacturer. Plug-compatible manufacturers are those who make computers compatible with both IBM hardware and software. As described in September 1977 Fortune, the Amdahl equipment provided better performance for less money. IBM’s machines were water cooled; Amdahl’s were air cooled, which decreased installation costs by $50,000 to $250,000. The use of LSI (large-scale-integration), many integrated circuits on each chip, meant the Amdahl 470 V/6 was one-third the size of IBM’s 360/168; the V/6 also performed more than twice as fast and sold for about 10% less. Machine sales remained slow due to concerns over the company’s survival. By spring of 1977, however, Amdahl had 50 units in place, seriously challenging IBM in large-scale computer placements. To improve its cash position, Amdahl decided to sell rather than lease its equipment. IBM responded by slashing prices, forcing Amdahl to follow suit.

In 1976 Amdahl successfully went public with its stock. With the new funds, the company converted its debt to equity, had substantial cash reserves, and found itself operating at a profit. Revenues climbed from less than $14 million in 1975 to $321 million in 1977, with a net income of $48.2 million.

In response to the challenge from Amdahl, IBM announced several machine enhancements. Not until the announcement of its 3033 in 1977, however, did IBM come up with a competitor to the price/performance ratio of Amdahl’s 470 V/6. Amdahl responded by announcing a new computer: the 470 V/7. About one-and-a-half times faster than IBM’s 3033, it would cost only 3% more. A year later Amdahl had installed 100 of the machines.

Even after two years of full operation, Gene Amdahl and Gene White still spent much time in high-level sales. Many customers insisted on meeting Amdahl before closing the deal. The company had been loosely organized even at the top; any mention of a chief executive officer was omitted intentionally from the corporate bylaws.

In 1977 John C. Lewis joined Amdahl as president. He had been president of the business-systems and data-systems divisions of Xerox Corporation and had spent ten years in management at IBM. Gene White became deputy chairman.

In early 1979, IBM introduced a line of medium-sized computers called the 4300 series. This line, coupled with reports that IBM would soon be announcing the H-Series of large computers, prompted many Amdahl customers to lease rather than buy equipment to be able to shift to an IBM product. This development created serious cash-flow problems at Amdahl. Revenues dropped by $21 million in 1979, with a 64% drop in net income.

On September 1, 1979, Gene Amdahl resigned as chairman, a post he had held since 1970. Deputy chairman Eugene R. White became chairman of the board and chief executive officer, a post that had never before been filled. Staying on the board as chairman emeritus, Amdahl led a new technical-excellence committee and participated in planning the company’s major strategy. Less than a year later he resigned from the board to form Trilogy Corporation, a computer company which would compete directly with Amdahl and IBM. Recognized as one of the world’s leading innovators in computer design, Amdahl again put his creativity to work on a new venture.

Meanwhile, in 1979 Amdahl Corporation failed in an attempted merger with Memorex Corporation, a manufacturer of computer-data-storage equipment. In 1980, Amdahl tried to merge with Storage Technology Corporation, maker of printers and tape and disc storage subsystems. Both attempts failed because Fujitsu, Amdahl’s largest shareholder, added modifications to the agreements which the merger partners rejected. The Japanese corporation feared losing its influence in a merger and wanted to keep tight reins on proprietary technology.

In November 1980, IBM announced the 3081 processor, previously labeled the H-Series, which offered twice the performance of IBM’s top model, the 3033. The industry waited for Amdahl’s response. Six days later Gene White announced the 580 series, with processors twice as powerful as the Amdahl 470 series, while still compatible with it, and more compact and more energy efficient. Amdahl’s new product was not slated for shipment until April 1982, however, and did not actually ship until August 1982, causing a drop in net income. IBM planned to release its new product in late 1981. In addition Amdahl’s early 580 series processor had significant reliability problems, and did not anticipate some of the features of the new IBM product. After the U.S. Justice Department dismissed a 13-year-old antitrust suit against IBM, the giant computer manufacturer was able to price its products more aggressively and move faster with new technologies.

To expand its market in mid-1980, Amdahl completed the successful acquisition of Tran Telecommunications Corporation, a maker of digital data communication networks. In 1982 Amdahl branched into the realm of storage devices by offering the direct-access storage device supplied by Fujitsu. This expansion enabled Amdahl to broaden its product base and provided a buffer against the vicissitudes of direct competition with IBM’s large-scale computers. By 1988 Amdahl’s sales of storage devices had grown to about 20% of total sales. To remain competitive in its fierce battle with IBM, Amdahl was spending 13% of total sales on research and development in 1983, while IBM spent only 6.3%.

In 1984 Amdahl developed UTS, its version of UNIX, the operating system developed by AT&T. This step provided Amdahl with new markets. Amdahl claimed that UTS— which is compatible with UNIX—run on the Amdahl 580 operated 25% faster than IBM’s comparable operating system and for a lower licensing fee. The developers of the operating system ensured its complete compatibility with IBM’s control programs.

Amdahl introduced multiple domain feature (MDF) in late 1984. MDF enabled a computer to run two or more different operating systems concurrently, while also performing multiple tasks. In just over two years, 30% of the Amdahl 580 series sites used this feature, cutting costs on software, hardware, and personnel.

In 1984 Heizer decided to liquidate its Amdahl stock. Fujitsu bought the offering, expanding its holdings to about 49%. The Japanese firm was prohibited by mutual agreement from owning more than 49.5% of the shares, and in 1990 held about 43% of the company’s stock.

Over the years Fujitsu provided important components and subassemblies for Amdahl processors, including LSI logic chips and very-large-scale-integration emitter-coupled logic chips, which are essential to Amdahl products. Fujitsu also played an important role in the design and manufacture of peripheral products. The two companies worked closely in supporting each other in their respective technological developments.

In May 1985 a former IBM executive, E. Joseph Zemke, joined Amdahl as chief operating officer, sharing the office of the president with president and CEO John C. Lewis. Zemke had most recently been president and CEO of Auto-Trol Technology of Denver, Colorado, and had been corporate director of marketing at IBM.

Amdahl’s model 5890, introduced in October 1985 to compete directly with IBM’s Sierra-class CPU, stood up against its IBM counterpart in reliability and technology, and offered multiprocessor capabilities that enhanced the performance range of Amdahl processors. In late 1986, Amdahl began shipping its new model. The computers performed even better than advertised and final quarter sales boosted revenues to nearly $1 billion. The success of the model 5890 was reflected in Amdahl’s increased customer base. Between 1980 and 1985 its customer sites in the United States grew from 450 to 1,350, and globally from 14 to 19 countries. The company also increased sales of its large-scale disc-storage products made by Fujitsu.

Continued shipment of its successful product lines during 1987 catapulted Amdahl’s revenues to $1.5 billion, an increase of almost 56% over the previous year, and earnings jumped nearly 250%. The company upgraded its successful 5890 to keep abreast of improvements in IBM’s 3090 computer. Its further commitment to UTS enhanced its strength.

John C. Lewis was elected chairman of Amdahl in May 1987, retaining the title of CEO. E. Joseph Zemke became president, but continued his duties as chief operating officer. Gene White, formerly chairman, again became vice chairman. At this point Amdahl Corporation appeared successful in a fiercely competititve market.

For most of its existence, Amdahl had played catch-up to IBM’s product announcements, but in May 1988, it took the initiative and announced a new product line, the 5990 processor. New customers poured in. IBM reacted quickly to defend its 69% of the U.S. large-scale-computer market share, but the new processor—acknowledged as the fastest in the industry—not only out performed IBM by almost 50% but was more compact and cost less. By the end of 1988 Amdahl had shipped over 40 of its new mainframes.

The price and performance features of Amdahl’s products raised sales nearly 17% to $2.1 billion. IBM responded by discounting its systems. Amdahl announced its own discounts, but this decreased profit margin caused earnings to fall by 30% in 1989.

Against formidable odds, Amdahl has survived as a significant competitor in a mainframe market dominated by IBM. Its consistent ability to produce computers with a superior price/performance ratio has helped keep Amdahl competitive. Staying on the leading edge of technology and catering to its customers’s needs launched Amdahl over $2 billion in revenues in 1989. Amdahl is expanding globally, with one-third of its revenues coming from Europe and 8% from the Asia and Pacific region.

Principal Subsidiaries

Amdahl Canada Limited; Amdahl International Management Services Limited (U.K.); Amdahl Pacific Services Pty, Ltd. (Australia); Amdahl Australia Pty. Ltd.