Large Unisys (UIS) Holder MMI Investments Urges The Company To Explore Options for Government Business

In an amended 13D filing today on Unisys Corporation (NYSE: UIS), 9.9% holder MMI Investments urged the company to move immediately to hire a banker and review of all available strategic alternatives, with a particular focus on the potential realization of the U.S. Government business through a sale, tax-free spin-off or subsidiary IPO.
MMI said the company's restructuring benefits are not enough to correct Unisys' dramatic undervaluation. The said the undervaluation is in large part because of flaws in Unisys’ strategic configuration.

MMI requested a meaningful response from Unisys on or before January 23rd, or they will consider possible alternatives available to them, including with respect to the upcoming annual meeting of stockholders.
Unisys confirmed they received the letter from MMI and said they are is in the process of evaluating it.

A Copy of the Letter:

Dear Members of the Board:

MMI Investments, L.P. presently owns 34,787,000 shares of Unisys, or approximately 9.9% of the outstanding stock. As one of Unisys’ largest stockholders for more than a year, MMI has supported the company’s restructuring efforts, but felt tremendous frustration with the seemingly continuous stream of management, operational and financial missteps that have characterized recent performance, obscuring otherwise impressive growth in EBITDA as a result of the restructuring and undermining the significant intrinsic value of Unisys’ U.S. Government business (i.e., federal, state and local). Moreover we are mystified by management and the board’s inaction in the face of Unisys’ ruinous stock price performance over the past year. We believe Wall Street’s utter rejection of Unisys stock is indicative that the restructuring benefits are not enough to correct Unisys’ dramatic undervaluation. We believe that Unisys has serious flaws in its strategic configuration, which impair stockholder value due to the taint of the secularly declining Technology business and obscure market recognition of the highly-valuable U.S. Government business. Therefore we believe it is crucial that Unisys move immediately to announce the engagement of an independent, qualified investment bank to perform a review of all available strategic alternatives, with a particular focus on the potential realization of the U.S. Government business through a sale, tax-free spin-off or subsidiary IPO. This assignment should include undertaking the prompt execution of whichever transaction or transactions will lead to maximizing stockholder value. A review without follow through is of no help.
Management and the board have ignored several of our recommendations as to how Unisys can improve its perception by Wall Street and conform to the most basic expectations for a public company, including guidance issuance, increased segment transparency and a reverse stock-split (to avoid the perils of sub-$5 stock trading price, e.g. high volatility, institutional holder restrictions, etc.). There has been no shortage of similar constructive suggestions by Wall Street research analysts, other investors and qualified investment bankers. Meanwhile Unisys management has produced a cavalcade of small failures to dampen investor enthusiasm, such as the ongoing use of contract labor, the dramatic weakness in Consulting & Systems Integration and the recently botched refinance. We believe that these slip-ups, and the regularity thereof, have effectively decimated any investor enthusiasm for a restructuring that has impressively driven EBITDA from approximately $212 million (including retirement plan expenses) in 2005, to an estimated $523 million in 2007 and with expectations for $663 million in 2008 (even despite the delayed 8% to 10% operating margin targets).1 In short, you’ve thrown an earnings party and no one has attended.
We believe this undervaluation is in large part because of flaws in Unisys’ strategic configuration. The damage done to stockholder value by the drag of Technology and the failure to unlock the value of the U.S. Government business are significant and must be addressed. We believe that Unisys’ need to demonstrate a commitment to stockholder value is pressing, and the maximization of the value in the U.S. Government business provides the best opportunity for improving stockholder value in the immediate term (following which the severability of Technology can be addressed). The analysis included herein assumes that the separation of roughly $1.5 billion in U.S. Government revenue (with EBITDA assumed to be in-line with the margins of comparable companies) could result in a stock price of approximately $8 to $12 assuming the U.S. Government business trades in-line with its peer group multiples and the remaining Commercial business trades at the low-end of its peer group multiples.

In our view, the best alternative would be an initial public offering of 19% of the shares of a subsidiary of Unisys comprising all of its U.S. Government services business. This would allow for the highest multiple business to have its value recognized, raise equity capital for the company at an attractive price and provide employees of that unit with financial incentives as owners. Doing so would also preserve flexibility, including the ability to further monetize the business through the public market, sell the business with an M&A control premium or eventually complete a tax free spin off of the balance of the subsidiary shares to Unisys stockholders.

This analysis cannot quantify the significant additional operating benefits of such a transaction. We believe that the government contracting industry will continue to experience significant consolidation. Without a fairly-valued equity currency, and with the capital constraints of the rest of Unisys’ business, the U.S. Government business cannot be expected to participate as an acquirer and therefore risks falling behind its peers competitively. The undervaluation of all of Unisys’ businesses, but particularly U.S. Government, also impedes Unisys’ ability to compensate its employees through equity incentives – particularly given the recently-adopted policy to increase 401k matching contributions funded with Unisys stock. By continuing to ignore stockholder value, Unisys is literally jeopardizing its employees’ retirements.

We have expended significant time and effort considering these issues and attempting to convey their gravity to management and the board. We do not publicize our frustration lightly and understand that the board may have discussed various alternatives from time to time, and concluded that the restructuring was the first priority. However we believe the time for patient observation of the restructuring plan (which management’s public statements suggest is close to completion) and silent consideration of options has long passed. The time has come for significant action from this board. Your inaction is threatening to cause permanent value destruction at Unisys. We request a meaningful response on or before January 23rd. Otherwise we will be compelled to consider all possible alternatives available to us, including with respect to the upcoming annual meeting of stockholders.

Sincerely,
Clay Lifflander