CONVERGENT TECHNOLOGIES (1)
From the beginning, it has been a written policy at Convergent Technologies Inc. that key employees must take a 13-week vacation between their fifth and sixth years of employment. For Allen H. Michels, Convergent's 44-year-old founder and onetime chief executive officer, the requirement probably took effect none too soon. Uneasy lies the head of a high-technology CEO whose company loses a whopping $13.8 million in its fifth year of operation -- particularly when his company is the fastest-growing public corporation in the country.
Indeed, over the past few quarters Convergent has been on a decided cold streak. A new line of business had to be shut down. The advent of Convergent's newest product, a desktop workstation, continued to be just around the corner for several corners. The company's stock, traded over-the-counter, withered from more than $40 to less than $5 in two years. A $50-million public offering of debentures that might have relieved short-term financing pressures was withdrawn. A key person resigned. Financial statements proved to be glutted with excess inventory and late receivables. To add insult to injury, disgruntled shareholders were suing the company for allegedly misrepresenting corporate conditions.
As late as last November, Michels publicly dismissed such concerns as "utterly ridiculous." But come January -- five years and three months after Convergent was organized (as a limited partnership) -- it was time to take his sabbatical. Coincidentally or not, that was the month Michels was replaced as president and CEO.
In five more years, Paul Ely, 53, the former Hewlett-Packard Co. senior executive who was hired to take over, can expect a similar departure from the corporation's San Jose, Calif., headquarters for a forced breather. By then, of course, he hopes that earnings will be on the same rocketlike trajectory that revenues have been on for the past five years. Admits vice-president of planning Jay M. Spitzen, summing up a situation of which Convergent's shareholders have been acutely aware, "We have solved only half the problem." As more than a handful of previous rapid risers can testify, the other falf -- converting revenue into income -- can be far more difficult.
So named because computers seemed to be at a crossroads when the company was founded, Convergent chose to follow an already well-trod, high-margined route as an original equipment manufacturer (OEM) supplier. The company's strong suit lay in developing and manufacturing computer systems for the labels of other companies, such as Burroughs Corp. and NCR Corp. At first, the job seemed easy. By 1982, the year Convergent went public, the company was netting 42? per share, up dramatically from 4? a year earlier. In '83, though, income per share leveled off at 40?, despite revenue growth of some 70%. After that, with 1984 sales more than doubling from the previous year, came the deluge: $14.5 million of losses from discontinued operations, which had to be written down against a mere trickle of income. And coming into 1985, the company admitted that making good on a large contract with American Telephone & Telegraph Co. was going to eat into profitability months after the long-delayed desktop system was finally deliverable. It was not a pretty picture.
But then, shareholders parted with a pretty penny (said to be $2.6 million over three years, plus stock options) to entice Ely to confront just such an ugly mess. The bond flotation is "stone-cold dead," the company says, but the new CEO is determined to reduce Convergent's borrowings through internally generated cash flow -- after meeting the payroll, of course. He will have his work cut out for him; Convergent is a case study in what happens when super-fast growth is not preceded by super-fast planning. The company, Ely pledges, will go back to the textbooks and construct controls in such rudimentary areas as order management, production scheduling, inventories, and receivables.
With its astounding five-year compounded annual sales gain of 467%, Convergent Technologies may yet emerge as one of the stellar companies of the 1980s. Indeed, it ought to. But until then, any CEO of a profitable company with even a modest growth rate can take smug comfort simply in returning from a two-week vacation and going to work.