Dealers of Lightning (9 page)

On Monday, February 10, 1969, the two of them announced that
Xerox, in the largest transaction it had ever undertaken and one of the
largest in American corporate history up to that time, would buy Scien­tific Data Systems for more than $920 million. McColough s one-man ini­tiative stunned the investment community. For one thing, he proposed to
pay Palevsky in Xerox shares. It was true that the stock was a high-flying
favorite on Wall Street—trading at $269 a share, it was cheap currency
indeed to spend on an acquisition. But that did not mean it could not be
squandered. Xerox would have to issue nearly 3.5 million new shares to
pay for the deal. Max Palevsky would be transformed into Xerox's single
largest stockholder in one giant step. Plus he was to be awarded seats on
the board of directors for himself, his venture banker Arthur Rock, and
two trusted lieutenants.

This for a company that had never made more than $10 million
in
a
single year. IBM itself traded for less than half the purchase premium
McColough had agreed to pay for a company with one-hundredth of
its market share. If things did not pick up at SDS, Xerox's investment
would not be paid off for 92 years.

Concerns surfaced immediately that Xerox was buying an empty shell
in its desperation to get into the computer business. Top managers were
already leaving SDS in droves, many of them retiring on what they had
made
from the rise in its stock price
over the
previous few
years. Palevsky
himself had openly announced his
intention to
withdraw from
day-to-day
management as soon as possible. On
the job
he was prone to distraction,
a dabbler
in politics, movies, the peace
movement.
There
was
reason to
question
whether anyone would be
left to mind
the store.

Back
at headquarters Jack Goldman
was as
shocked by
the SDS
deal
as
everybody else.
"I
was the head
of research
for the company," he
said,
"but
I
wasn't consulted. At
all."

He
was willing to forgive the slight
as the
price of being
a
newcomer,
but only up
to
a point. For his opinion
to
be overlooked on
a
major
technology venture tasted disagreeably
of Xerox's
traditional
concep­tion
of research: fine in its place, but
irrelevant
to anything as impor­tant as strategic planning.

From what Goldman could tell, this
attitude
pervaded the company,
to its misfortune.
It
affected even
the kind of
research being
done
at
Xerox's
main technical laboratory, a
vast
installation
spread over the
Rochester
suburb of Webster. At
Ford,
Goldman's biggest budgetary
headache had been finding money for
all the
computers
the engineers
and
scientists demanded for their labs, not to mention the
outside
experts imported by the platoon to help them exploit the new technol­ogy in designing cars.

Nothing of the kind ever occurred
at Xerox
research.
The Webster
engineering and research staff treated the new science of computer-
aided design with utter indifference.
Webster's
classically educated
chemists,
physicists, and metallurgists
devoted
their
attention to
nar­
row,
product-oriented tasks, trying to
develop
better toners
and pho­
toreceptors to drop into copiers designed
the
same old
way. As far
as
that went
they were talented enough,
but
they had
no
incentive to
keep
up with new research techniques.
As
for applying imagination
to an entirely new science, concept, or machine,
Webster was
hope­less.
It
was not research as
Jack
Goldman understood
the
word; it
was
product development, which was something very different.

"Real
research people tend to interact with the world at
large,"
he
observed. "They
know what's happening on the university campuses and
get
invited back and forth, so they become an avenue through which you
can attract new ideas into the company. Research is a funnel through
which you can bring in people who normally won't talk to the guys down
in
the trenches designing equipment," he said. Xerox had not been get­ting new ideas, and it showed. By allowing its researchers to isolate them-
selves the company had become as musty as a sealed tomb.

Goldman had only agreed to join Xerox because he saw a glimmer of
hope in McColoughs forward-looking determination. The gentlemanly
Canadian-born executive had lured Goldman away from Ford by
pledging to place corporate research on an entirely new footing. Gold­man may have felt somewhat out of place at headquarters—short,
rotund, and profane, quick-witted and sharp-tongued, and educated at
Yeshiva University, he certainly made a contrast to the patrician, Ivy-
Leaguish executives that commercial success had attracted the Xerox
management cadre. But McColough had promised that as chief scien­tist he would have the authority to conduct research from the bottom
up, following wherever science led him, rather than top-down, which
only served the interests of the company's old guard. That made the
offer hard to resist.

Now Goldman found his confidence shaken. Acquiring a computer
manufacturer could have helped inject a new attitude into a Xerox that
had devolved from a nimble, innovative risk-taker into a creaking giant.
But SDS was not that kind of acquisition. He was appalled at its intellec­tual conservatism. SDS computers were good enough in their own mar­ket, he confided to his colleague George White, but their day had passed.
No one would mistake them any longer for leading-edge. "He felt those
guys down there in El Segundo were just a bunch of dumbbell copycats
as far as technology was concerned," White recalled. "They were never
going to be first on anything that mattered."

Yet they might serve a subtler purpose. As the SDS purchase moved
toward a shareholder vote at the corporate annual meeting in June, Jack
Goldman contemplated how to snatch a new opportunity for Xerox from
what was already being labeled "Peter McColough's Folly."

McColough fought Wall Streets doubts about SDS with all the rhetoric
a corporate chief executive could muster. His waning prestige made it an
uphill battle.
A
year or so earlier
he had
disgruntled the investment com­munity with an equally headstrong—
and
unsuccessful—takeover bid for
the financial services company
CIT. This new
transaction revived com­plaints about his "golf-course"
deal-making, a
label he detested.
SDS
was
a
successful company with its best
years still
ahead, he asserted.
"It
had
been
making profits every year.
The growth
record was great. The prof­itability record was great. So we made
a deal."

His
arguments only incited more
skepticism.
The growth prospects in
SDSs
main lines of business were
meager, not
great, according to indus­
try
analysts whose ardor for the transaction continued to cool.
Finally,
at
a luncheon meeting of
New
York
securities
analysts,
McColough
laid out
a grandiloquent vision. It was wrong to
look at SDS
and
Xerox
as separate
companies, he said. His idea was for
SDS to
help
Xerox
expand its rule
over the office copier market into the domination of a greater universe—
"the office of the future." The Xerox
to come,
he declared emphatically,
would control "the architecture of
information."

The
phrase was classic
CEO-speak, grave,
tendentious, and nebu­lous enough to be perfectly consistent
with
any strategy
Xerox
chose to
pursue. McColough later attributed
the
wording to his speechwriter.
Yet
for the next decade it would hang in
the
air like an persistent echo.
The
architecture of information: The phrase might as well have been
chiseled over the doors of the hilltop palace
Xerox
would soon build to
house a group of employees quite unlike
any
others the company had
ever placed on its payroll.