(FORTUNE Magazine) – A CHORUS OF CATCALLS last May greeted the news that W. Michael Blumenthal, the wily, iconoclastic chairman and chief executive of Burroughs Corp., was buying Sperry Corp. in a massive $4.8-billion takeover. ''It's like merging the Lusitania with the Titanic,'' scoffed a market researcher. Analysts called the merger, by far the largest in computer-industry history, ''barely comprehensible'' and ''ludicrous.'' John T. McManus, a security analyst at the brokerage firm Thomson McKinnon, declared it did no more than unite two starvelings who must live on scraps left by IBM in the market for big computer mainframes. Worse still, said McManus, the merger would saddle the new mates with the back-breaking cost of supporting incompatible product lines, and stampede Sperry customers into Big Blue's camp. Blumenthal's prize had been looked over and rejected by many suitors. Most lusted after Sperry's $2.2-billion-a-year defense electronics business but got turned off by its $3.5-billion-a-year computer division, which Sperry itself thought of as a shark repellent. Sperry's product line was full of holes, though the company had been sinking 12% of its annual computer sales into R&D (vs. an industry average of 8%). Even history was against Blumenthal's big idea: Disaster attended the computer industry's only other major couplings, Honeywell's 1970 acquisition of General Electric's computer business and the 1971 merger of RCA's data-processing operations into Sperry's. Yet since September, when the deal was consummated, Blumenthal has been looking smarter and smarter. He seems to have pulled off a coup, paying only $620 million in excess of Sperry's asset value, much below what outsiders expected. The $3.4-billion debt Burroughs took on, at the expense of its A rating, looks less scary than it did at first. The company has already repaid $700 million, and falling interest rates have trimmed at least $20 million from Burroughs' projected annual debt service of around $400 million. Contrary to what the doomsayers expected, Sperry's customers haven't bolted, and neither have its key managers and engineers. Burroughs' earnings for the last two quarters have risen 56% over profits for the same period last year, a surprise that was doubly unexpected in light of the slowing of computer demand that has sandbagged IBM. The catcalls Blumenthal was hearing have modulated into a susurrus of doubts. Next year even those should disappear and the cheering should start. Burroughs had announced plans to recover its A rating within two years by selling $1.5 billion of assets. Now it seems the company can raise at least that much in half the time by hiving off parts of its Memorex subsidiary, along with Sperry's avionics and marine instruments businesses. Other asset sales could push the total close to $2 billion by the 1988 deadline, delighting the bond raters. The merger will probably produce cost savings far greater than Wall Street now believes. Analysts have relied on Burroughs' public estimate that the merged company can save $150 million a year in operating expenses. On that basis, according to an average of analysts' projections, earnings per share will fall just below $7 next year. But the cost savings of the merger could top $400 million a year, around 4% of operating expenses. Not all of that will come right away, but Burroughs and Sperry are rationalizing their operations with surprising speed and assurance. With the savings the merged company has an excellent chance of hitting its 1987 earnings target of $8 to $9 per share, at least a dollar above Wall Street's consensus prediction. Provided the cost cutting doesn't sap sales, and assuming that the bulk of merger costs are charged against earnings at the end of this year, the supposed misalliance of Burroughs and Sperry will start to look like a master stroke. For Blumenthal, however, the ultimate vindication will come only if his new company takes business away from IBM in the market for mainframes, the multimillion-dollar number crunchers that do everything from tracking money in banks to managing government bureaucracies. IBM so dominates the business that Burroughs, Sperry, and other makers of equipment not compatible with IBM's are forced to battle among themselves for a small and shrinking piece of the market. Having spent most of his life outside the computer industry, the strong-willed Blumenthal has found this gritty competitive reality hard to accept. Blumenthal fled Nazi Germany as a teenager and started his career as an economics professor at Princeton. He then shifted to Washington and made a name for himself as one of the Treasury Department's toughest trade negotiators. His business education came at Bendix Corp., where success in restructuring the company earned him the chairmanship. He learned everything he needed to know about politics in a three-year stint as Secretary of the Treasury under President Carter. But none of that experience fully prepared Blumenthal for the cruel world of mainframe computing. He moved to Burroughs as chief executive in 1980, when the company was on the skids, and has executed a solid turnaround. Sales have grown at 12%, compounded annually, since he arrived, and profits at 25%. Return on equity, now 10%, is more than twice as high as in 1980. But it is still only half IBM's typical return, and the price of Burroughs stock, recently $69 a share, is fathoms below the $108 high it touched in 1975. THE PROBLEM is circular: Burroughs can't build enough sales volume to make its costs competitive and beef up profits, but until it does, new customers will be afraid to buy. For years, Blumenthal recalls, he was amazed by potential customers' skepticism: ''Burroughs was a $5-billion-a-year company, the 72nd-largest in the U.S. and the third-biggest computer company in the world with a track record of 100 years. But IBM is so dominant that customers needed my personal assurance that we would be around in five years!'' His only hope for becoming large enough to compete with IBM and other Godzillas like Fujitsu and Hitachi, which sell IBM-compatible gear, was to buy the customers of another mainframer. Sperry's were virtually the only ones available. The new company's sheer size, Blumenthal believes, will enable it to snag at least some new business. It will have roughly $11 billion in sales this year. That's less than one-fifth IBM's likely total, but enough, Blumenthal thinks, to scatter the clouds of FUD -- the fear, uncertainty, and doubt with which customers greet any computer maker other than Big Blue. Sperry faced the same problems in its computer business, but the company's managers couldn't bring themselves to merge. For 17 months starting in January 1985, when it held talks with ITT, Sperry flirted with over a dozen potential partners and never acted. Part of the coyness was pride. ''You like to think you can compete independently,'' says Joseph Kroger, who was the deepest-dyed enemy of the merger, having sat in the president's chair at Sperry for only seven months before Blumenthal won out. Fear also played a part. ''I thought of all the trauma our people would go through,'' Kroger recalls. ''And I questioned whether any company could afford to maintain two incompatible families of mainframe computers. If not, our customers might abandon us.'' Blumenthal had some messages that he thought Sperry would be pleased to hear. Burroughs had concluded that maintaining two product lines was not only feasible but absolutely necessary to retain Sperry's customers. Like all mainframe users, Sperry customers invest heavily in software unique to the computer they have. If Burroughs stopped selling Sperry machines, the customers would lose their software investment and likely switch their allegiance to IBM. Instead of axing Sperry's products, Blumenthal wanted to revitalize them. Moreover, the kind of combination he had in mind was a true merger, not an acquisition. The new company would be a full partnership of Sperry and Burroughs; merit would be the guiding principle for choosing new organizational structures and assigning management posts. Sperry's executives, feeling threatened, were not ready to listen. So in May, while starting his run at the company, Blumenthal launched a Teflon-slick public relations campaign. Its goals were to soothe Sperry's fears and curry favor among investors, who would, in turn, apply pressure on Sperry's directors to negotiate instead of fighting. For three weeks Blumenthal tirelessly lobbied institutional investors, security analysts, and the press about his benign intentions. Burroughs sent out 7,500 copies of a ten-page justification for the merger. In extraordinary detail the document laid out plans for the two companies after the merger, stressing Burroughs' commitment to maintaining Sperry's product line and explaining the combination's benefits for shareholders, customers, employees, and -- hark, the trumpets -- even the nation. When Sperry finally capitulated, Blumenthal handled the question of management posts delicately. ''From day one he talked partnership,'' says Kroger, ''and I have to give him full credit for not just walking in and announcing who would run what.'' Sperry Chairman Gerald Probst, 63, agreed to become vice chairman of the merged company, although he reportedly wanted to retire. The real prize, in Blumenthal's eyes, was Kroger, a fierce partisan of Sperry's computer business. After some wooing Kroger said he would stay as Sperry's president, at least until the merger was consummated. Blumenthal adroitly defused a time bomb that might have demolished his plans. Sperry had issued three-year contracts to 132 executives entitling them to quit and receive three times their most recent salary and bonus in the event of a takeover. To prevent an exodus, which would cost an estimated $80 million and make a partnership impossible, Blumenthal persuaded Sperry to swap these golden parachutes for new ones. Blumenthal's models offered more money, but they pop open only if a manager's duties change substantially, or his pay or responsibilities get cut. Almost all the executives signed; none have quit the company. The big holdout was Kroger, who was trying to negotiate more liberal terms for himself. Keeping customers loyal has proved fairly easy so far. Burroughs lucked out: The takeover fight, which the company expected would take four to six months, ended after 22 days, giving Sperry customers little time to worry. Even so, Sperry's orders, which had been rising, weakened in the second quarter, dropping 19% from the level of a year before. One organization of Sperry users wrote Blumenthal and Probst, warning that any merger would end in ''serious erosion of the Sperry user base.'' AS SOON AS the deal was done, Blumenthal began a customer-relations push. He visited scores of Sperry customers, sent thousands of them frequent letters, and addressed meetings of Sperry's user groups, whose member companies account for over half of Sperry's computer revenues. The message: Burroughs really does mean to maintain and enhance Sperry's product line. A new office of customer communications fields questions, and two of its representatives tour the country to ensure that no customer doubts Burroughs' commitment to keep new Sperry products rolling out the door. In October, Sperry backed up all the jawboning by unveiling a long-awaited line of medium- size computers. The success of the merger depends on the willingness of Burroughs and Sperry employees to stay on at Newco, as the combined company is being called while lawyers check out a new name, which is still secret. Blumenthal asks: ''How do you convince the most competent, most headhunted people to step into this new situation, giving up what they had for what may look like less responsibility?'' Part of his answer is to invoke a sense of mission in the united crusade against IBM. ''For computer people,'' Blumenthal points out, ''that has enormous appeal. It's the promise of glory.'' Signing people up has meant giving them a say in what Newco will be. Blumenthal set up a transition team of five top managers from Burroughs and three from Sperry, as well as 13 middle-management task forces charged with recommending the elements of a new organization. From June to September the task forces combed through their assigned chunks of Burroughs and Sperry, looking for sensible ways to combine them and trying to meet the transition team's bogeys for cost cutting. The pressure was intense: Newco wants to be almost done with reorganizing by the end of this year. People from Burroughs and Sperry participated equally, and cronyism and empire-building were taboo. ''We made it clear from the top that people must have open minds,'' says Kroger. ''Those who tried to protect their turf would be eliminated.'' The task forces were the idea of two psychologists whom Blumenthal summoned the day after Sperry agreed to merge. Philip Mirvis of Boston University and Mitchell Lee Marks of the California School of Professional Psychology in Los Angeles bill themselves as specialists in treating ''merger syndrome,'' the demoralization that often cripples a newly acquired company. The stresses of merging, they say, can drive executives to treat every decision as a crisis, gather in the reins of power, and cut off communications with their subordinates and the outside world. Managers become too busy defending their organizations to spend time running them. Before long, turnover revs up, with the best people leaving first, and operations fall apart. Working on the task forces, middle managers from the two companies learned how to team up and began to form bonds. The psychologists urged that the two companies reinforce their partnership with symbols and ceremonies that would capture the imagination of the management rank and file. Blumenthal's lieutenants were sure the idea would fall flat with the boss, whose style retains traces of the courtliness he learned as a child in Europe. ''Everyone told us that sort of thing was too touchy-feely for Mike,'' says Marks. But when Blumenthal met with the task forces last September to hear their reports, he went along, producing boxes of symbols -- baseball caps bearing both the Burroughs and Sperry logos. Whenever a manager started building up one company at the expense of the other, Blumenthal would bark, ''Put on your Newco hat.'' The phrase became a slogan to defuse rivalry. SOME OF THE biggest savings were found by task forces studying procurement, distribution, and physical plant. According to George Gazerwitz, a vice president who supervised those teams, the quickest savings come from purchased materials, which account for $2.5 billion of Newco's costs. Newco is reviewing contracts with 3,000 suppliers, some of whom turn out to have been charging Sperry and Burroughs prices 20% apart for the same components. Newco now gets the lower price from most of these; by pooling Sperry and Burroughs orders, says Gazerwitz, it can win additional discounts of 5% to 10%. It has already squeezed some $25 million out of next year's bill for personal computers and printers it buys for resale. Gazerwitz says total savings on purchases will be in the hundreds of millions of dollars. In October, Burroughs announced that it would cut employment by 8%, or about 9,600 people. Most will come out of corporate staff, as well as staffs in the field that support the sales and maintenance forces. The reduction entails an early retirement plan with a price tag of $90 million; that amount, along with an estimated $110 million in severance pay for those who are laid off, will hit earnings this year. But Newco will start reaping the benefits in six or seven months, and they are huge. According to Daniel Mandresh, a Merrill Lynch security analyst, the 8% cut could be worth some $300 million a year. Newco still must resolve thorny organizational issues, starting at the very top. In September the company announced its new senior-management structure, minus Probst, who will retire at the end of the year. Newco's executive office looks like an attempt to forestall an explosive question of succession. Blumenthal, 60, remains chairman and chief executive. Kroger, 52, is vice chairman and is in charge of marketing computers to commercial customers. President Paul Stern, 48, a Burroughs man, runs the rest of the company, including research, manufacturing, and defense marketing. Staffs report to executive vice president James A. Unruh, 45. The hydra-headed office has no chief operating officer. Kroger, for one, doesn't think the arrangement can last long. ''Ultimately it's not the way to run a company,'' he judges. ''We will need a more structured and traditional organization.'' Who will win out in the competition to succeed Blumenthal is anybody's guess. Stern, a fierce engineer out of IBM and Rockwell International, came to Burroughs in 1981 to be groomed for the top spot. Kroger waged a ruthless campaign to rise to the Sperry presidency and expected to succeed Probst. Both men have powerful egos, but their similarity stops there. A marketing man to his fingertips, Kroger operates instinctively and , has always won by building political alliances. Stern is a steely rationalist who was hired to impose on Burroughs a discipline it sorely lacked. A Newco insider predicts Stern's style will get in his way: ''In an age when people talk of visionary leadership, does Blumenthal want a chief executive who takes an engineer's approach to organizations?'' Merger anxiety will run high at least until the middle of next year, when Newco is due to finish reorganizing. The decisions made so far seem consistent with the meritocratic ideal Blumenthal has pushed. Choice slots have been distributed fairly evenly among managers from both companies. That's been tough for some Burroughs veterans to accept. ''They were almost salivating over the jobs they thought they would get,'' says psychologist Mirvis. Though Sperry used to operate on the old-boy principle, Kroger seems to have been scrupulously fair at Newco. ''A lot of people must think I'm a traitor,'' he jokes. ''The top three guys I chose for international marketing are all from Burroughs, and my friends are asking, 'What's happened to your human qualities and deep concern for Sperry?' '' On top of merger issues, Burroughs has a tangle of business problems to straighten out. One is to keep profits up while maintaining two totally different lines of large mainframe computers and two lines of middle-size machines, each of which represents a unique architecture, or way of handling data, and uses incompatible software. The ancillary costs of a particular architecture -- distributing spare parts, training customers and repairmen, enhancing software, and so forth -- are so great that all computer companies dream of having one architecture across their product line. So do customers, who would like to use the same software programs on their smallest and largest machines. Digital Equipment Corp. is on a roll partly because it is close to achieving the dream; IBM is frantically trying to reduce the number of architectures it sells. BUT NEWCO is inexorably committed to multiple architectures, which will make for a perennial drag on profits. Hollis Caswell, vice president for engineering and manufacturing, says that Burroughs' and Sperry's big machines can be modified to use many of the same chips and other components. But he admits the software, which accounts for over half a big computer's development cost, will be different for a long time, perhaps forever. ''We never argued that two architectures are cheaper than one,'' says senior vice president | Curtis Hessler. ''All we said was that two architectures in two companies are more expensive than two architectures in one company.'' To realize the potential savings, Newco will have to impose strict discipline so that competition among its development teams doesn't breed unnecessary duplication. Newco must rush to fill ragged holes in Sperry's product line. Because the densely packed circuits in a large mainframe give off lots of heat, they have to be mounted inside the computer in a way that maximizes cooling. Sperry tried to finesse the problem a few years ago by betting on a radical chip technology. The project failed and Sperry's development schedule for mainframes went up in smoke. High-end customers who are running out of power anxiously wonder when they can get the next generation of Sperry's biggest machine, the 1100/90. Moreover, Sperry failed in its attempts to make large disk drives for storing data and recently had to start selling drives made by Hitachi. That hurt because disk drives can account for as much as 50% of the hardware revenues from a mainframe installation, and much more of the profit. Burroughs has technology to plug the gaps. Its methods for packaging and cooling chips are being used in Sperry's replacement for the 1100/90, enabling that machine to meet its performance goals. Memorex, the money-losing disk drive company Burroughs bought in 1981, is hungry for volume and can make drives at least as advanced as Hitachi's. But Memorex can't start manufacturing for Sperry until it gets special hardware for linking its drives with the 1100/90, and designing that electronic gear can take 18 months. Of special help in speeding product development at Sperry should be Burroughs' software expertise. Its computers are easier to program than IBM's because Burroughs pioneered the use of advanced computer languages to write system software, which controls a computer's basic functions. Sperry, by contrast, writes system software for its computers in the most primitive, time-consuming language. ''I don't know how anybody programs the damn things,'' says a scientist who used to advise Sperry. Most new Sperry products are likely to use Burroughs' more efficient languages. The trickiest question is whether Newco can increase its market share. Since Burroughs and Sperry generally sell into different markets, the merger offers intriguing opportunities for the two companies to pitch to each other's customers. For example, Sperry has installed many large mainframes among European banks, but it doesn't offer an attractive small computer that departments of a bank can link to the mainframe. Burroughs does, and it predicts the merger will increase revenues from small computers, now close to $300 million annually, by some $40 million next year. With a more varied basket of products, Newco is sure to get more of the money its present customers budget for computers. Greater size should dissipate FUD clouds and bring in new customers, some of them at IBM's expense. Bidding against Big Blue, Burroughs was recently negotiating a deal in the tens of millions of dollars with a major Asian bank, partly because the merged company's service organization has wider geographic spread. But gaining against IBM across the board is an extremely iffy proposition. According to International Data Corp., Burroughs and Sperry have been gradually losing market share in large mainframes. Together they hold merely 8.5% of the $17-billion-a-year market, compared with IBM's awesome 76%. Just stabilizing Newco's market share will be a challenge, let alone increasing it. That thought nettles Blumenthal. He still thinks of Newco as a ''historic restructuring of the entire electronic systems industry'' that will loosen IBM's hold. But stockholders don't need such a grandiose result. As long as Newco can exploit its plentiful opportunities for boosting sales and earnings, they will be happy to keep wearing their Newco hats.

CHART: INVESTOR'S SNAPSHOT BURROUGHS SALES (LATEST FOUR QUARTERS) $6.6 BILLION CHANGE FROM YEAR EARLIER UP 34% NET PROFIT $260.4 MILLION CHANGE UP 15% RETURN ON COMMON STOCKHOLDER'S EQUITY 10% FIVE-YEAR AVERAGE 8% RECENT SHARE PRICE $73.75 PRICE/EARNINGS MULTIPLE 14 TOTAL RETURN TO INVESTORS (12 MONTHS TO 10/24) 36% PRINCIPAL MARKET NYSE