Intergraph Corporation History

Address:

Huntsville, Alabama 35894-0001
U.S.A.

Telephone: (205) 730-2000
Toll Free: 800-345-4856
Fax: (205) 730-7898

Website: www.intergraph.com

Public Company
Incorporated: 1969 as M & S Computing
Employees: 8,200
Sales: $1.12 billion (1997)
Stock Exchanges: NASDAQ
Ticker Symbol: INGR
SICs:3571 Electronic Computers

Company Perspectives:

Intergraph and its business partners work with customers around the world and in virtually every industry to provide the powerful, business-critical solutions they need to succeed. Intergraph believes in providing substantial value for our customers by offering products that have the best technological foundation and are priced to meet today's demanding budgets.

Company History:

Intergraph Corporation develops and sells software, hardware, and services for technical professionals, particularly for those customers who are involved in computer-aided design, management, and engineering (CAD/CAM/CAE). Formerly a manufacturer of UNIX-based CAD systems, Intergraph initiated a major transition during the 1990s when it began developing systems based on Microsoft's Windows NT operating system and Intel's Pentium microprocessors, a transition that led to a series of annual financial losses during the decade. During the late 1990s, the company maintained sales and service organizations in 65 countries throughout the world, deriving roughly 45 percent of its revenues from foreign markets.

Late 1960s Origins

In 1969 James Meadlock left his position as an engineer at IBM to found the consulting firm M & S Computing. Meadlock remained in Huntsville, Alabama, not simply because he was a southerner, but because NASA had a flight center there, where Meadlock had helped develop software guiding the Saturn rocket to the moon. Thus, there was engineering talent in the area that Meadlock hoped to tap. Starting up with Meadlock, four engineers, and a secretary, the young company sought to be an innovator in interactive computer graphics, specializing in real-time applications.

As late as 1968, engineers and scientists were communicating with computers in a limited language: the user had to translate graphics for conversion to punch cards, wait for any group of data to be processed, and go to separately situated off-line plotters for the printed output. Real-time application meant the engineer could communicate directly with the computer, describing information in charts or graphs, with the elimination of the delay involved with punch cards and off-line plotters. Real-time graphics let the user maintain what was referred to as "thinking momentum."

Within its first year of operation, M & S Computing developed its first graphics system. The company posted a loss of $64,000 for the year. Given that Meadlock's initial investment had been $39,000 of his own savings, the amount was considerable, but it was the only loss ever posted by the company. By 1972 the company introduced a graphics system to the U.S. Army Missile Command, its first major customer, by creating software for government-supplied hardware. The following year, M & S Computing developed a mapping system for the city of Nashville, Tennessee; on M & S software it was possible for a city planner to call up specific city blocks, together with population and zoning specifics.

The company then worked on three-dimensional mapping, building up its engineering clientele with programs useful for oil exploration. The mapping experience led M & S toward the architectural design industry, a relatively open market at the time. At the time, most other CAD/CAM suppliers were going after the largest market, mechanical design for the aerospace and automobile industries, but this market was beginning to lag behind by the late 1970s.

1980s Expansion

By 1980, what had been known as the "computing industry" was moving forward so fast that a whole new atmosphere with new information technology companies was emerging. In order to compete, the consulting firm M & S Computing felt that it needed a name change. The name Intergraph was chosen and some new strategies were devised. Meadlock decided that with the advent of more powerful 32-bit computers CAD technology would have to be adaptable. While other companies tried to build their own computers, Meadlock went one step further, purchasing a Digital Equipment Corporation (DEC) computer and developing systems around it, a tactic which gave Intergraph a strategic edge. The company's main competitor, Computervision, bogged down in the attempt to create its own computer and fell slightly behind in overall sales, giving Intergraph the chance to move ahead.

Tougher competition lay ahead, however, as Meadlock faced his former employer, IBM, in the mechanical design market. By 1983, Intergraph had a sales force of only 65, while IBM's comprised thousands. Some inroads were made in the mechanical market during this time, however; Intergraph scored a contract with the Xerox Corporation, and one was in the works with Porsche.

Other challenges faced the company at this time, including the problem of rapid growth. With the number of employees proliferating, Intergraph found it necessary to overhaul its training program. The company also implemented a new sales-support group, members of which were called application managers. These specialists concentrated on the needs of individual workers, rather than on an entire industry's needs. The applications managers were assigned different areas, such as architecture, electronics, mapping, and plant design.

As a result of this new approach, Intergraph pulled ahead in several areas. It improved its position in the mechanical design industry, with 20 percent of 1983 company revenues coming from that market. The company also developed new products, including a series of workstations addressing computer-aided design from conceptualization through manufacturing. Devising marketable workstations was a coup for the company, since workstation technology was the wave of the future. Finally, Intergraph entered an entirely new market, marrying graphics to word processing in a technology suitable for the electronic publishing industry.

In an effort to enter the electronic design tool market, in September 1984 Intergraph invested more than $5 million in Tangent Systems, a two-month-old firm specializing in computer-aided engineering (CAE) software. For a 50 percent equity interest in Tangent, Intergraph would use its sales force to market the software in the United States and abroad. At this time the company had some salespeople and distributorships in place in Canada, but decided that this was not enough. By December 1984 Intergraph acquired the remaining majority ownership of its Canadian affiliates. Industry experts viewed Intergraph's changes favorably, regarding the company's entrance into new markets as good insurance during economic downturns.

A decline did occur, becoming apparent in January 1985, when manufacturers in general began slowing production. Intergraph, likewise, experienced a decrease in equipment orders. The company's stock was temporarily downgraded on Wall Street, but certain analysts believed the slowdown was merely due to Intergraph's emphasis on new product development. While Intergraph's equipment orders were 20 million less than expected in fourth quarter 1984, its long-term growth prospects were still considered excellent. IBM remained number one in the CAD/CAM industry worldwide, with Intergraph and Computervision close behind, vying for second.

By early 1985, industry competitors were taking notice of Intergraph Corporation; Intergraph was the only company to improve its market share against IBM in 1984. Intergraph began designing CAE products compatible with DEC computers; this move, together with the Tangent Systems equity, pushed Intergraph further ahead in its national competition with Computervision. The company also made an aggressive move to establish a Japanese subsidiary in March 1985. With a distributorship in place via Japan's Mutoh Industries, Ltd., Intergraph was now poised to compete in the international CAD/CAM/CAE industry. Other developments at this time included Intergraph's acquisition of The Rand Group, Inc., which agreed to develop engineering design-based software for the company.

With the acquisitions of Tangent and The Rand Group and its production of CAE systems compatible with DEC computers, Intergraph attempted to branch out from its established base of turnkey operations, that is, the provision of an entire CAD/CAM system, including the design, installation, and trouble-shooting of all software and hardware. While Intergraph was still viewed as a superior provider of such systems, the company did not want to be left behind as the industry moved toward more flexible PC-based systems. The challenge for Intergraph in the mid-1980s was to maintain its position as the leading turnkey provider while remaining a viable contender as the industry moved from hardware- to software-based systems.

In the area of electronics, Keith Schonrock, executive vice-president, remarked that "Intergraph is firmly committed to not just being a workstation supplier, or a components supplier, or a software-package supplier." Unlike most other competitors, who focused on one or the other categories, Intergraph would not be confined to niche markets. The company got around this problem by using existing technology and finding ways to work it into new markets, rather than simply responding to market demands after the fact.

By 1986 Intergraph branched out once again, acquiring Massachusetts-based Optronics, Inc., a producer of computer peripherals and optical scanning equipment. Intergraph's sales force grew 33 percent in less than a year--by mid-1986 the company employed 5,289 versus 3,483 in November 1984. Once again, the company reorganized its sales staff, dividing into the areas of mapping and energy exploration, mechanical design, and electronics and electronic publishing.

Some Wall Street observers expected the company to do more than refine its sales strategies, however; they called for corporate-wide restructuring. The criticism centered on the fact that Meadlock was still running the company single-handedly. With sales at approximately $500 million and expected to rise, some critics thought that a new level of management was called for as well as the addition of outside advisors to the board of directors.

Setting its sights on new workstation technology, in July 1986 Intergraph introduced new graphics workstations designed with Fairchild Semiconductor Corporation's Clipper 32-bit microprocessor. Key elements of the InterAct and InterPro 32C were their low prices, stand-alone design, and flexible architecture. With three independent subsystems including networking, graphics, and a processor/memory, users could upgrade to new technology without having to change the entire system.

By April 1987 Intergraph had run into trouble when Fairchild failed to provide enough computer chips for the workstation. The company lost approximately $25 million in revenues while waiting for the Fairchild order. This setback, together with the glutted market for Intergraph systems, caused the corporation to lose its status as a growth stock. The next two years proved a challenge, as Intergraph extended itself with a number of acquisitions. In June 1987 the company acquired 50 percent of Pennsylvania's Bentley Systems, MicroStation developer. In September, Intergraph sold Intraph South Africa Ltd. for cash; and in October the corporation acquired the advanced processor division of Fairchild Semiconductor Corporation. In a last attempt to control its investment, in April 1988 Intergraph acquired an additional 32 percent of Tangent Systems for $3.5 million. The deal included the company's additional acquisition of six percent of Tangent's Cadence Design Systems, Inc., a third-party software developer, by December of the same year.

By March 1989 Intergraph changed course entirely, deciding to exchange its 82 percent Tangent ownership for shares in Cadence Design Systems. Tangent, strong in the semiconductor and computer industries, did not give Intergraph entry into the larger range of markets it was looking for. More specifically, Tangent's first software product sold better in conjunction with workstations built by Apollo Computers, DEC, and Sun Microsystems than it did with Intergraph's InterPro workstations.

Although competition was stiff, Intergraph finally outstripped IBM and DEC, moving to number one in CAD/CAM/CAE sales in North America for 1988. While Intergraph ranked second nationally in electronic mapping sales, the company nonetheless finished the first quarter of 1989 falling about 15 percent in overall profits, with revenues down by $15 to $20 million. The last three quarters of 1988 showed marked improvement, however, as Intergraph bounced back with sales for the year up 24.8 percent from 1987.

Intergraph's success just when experts were predicting doom was due in part to the company's founder and chief executive officer, Jim Meadlock. Contending with intense competition and rapid changes in computer technology, Meadlock took an aggressive stance. Technical expertise continued to provide stability for Intergraph in the tumultuous 1980s. While Meadlock admitted in an article in Industry Week that he may have "missed the PC boom," Intergraph still had a highly competitive product on the market. MicroStation, only two years old, was the number three PC CAD software shortly after being introduced. Meadlock predicted that hardware would become even cheaper as more and more corporations established a central computer as their own database with individuals working from the desktop.

Fortunately for Intergraph, in August 1989 several major software providers announced they would port packages to the corporation's Clipper workstations, providing Intergraph customers with a number of software options. Within several months the company also decided to offer simplified commands for its UNIX workstations, devised by the Open Software Foundation and based on the icon system developed by Apple Computer. Intergraph increased its holdings in 1989, acquiring Quintus Computer Systems in October for $6.5 million. By November 1990, Intergraph announced its decision to buy Daisy/Cadnetix Inc., a CAD/CAE software producer, for $14 million. Advantages to the acquisition were Daisy/Cadnetix's international marketing stronghold based in Europe, a design center in Israel, and a large customer base. Disadvantages, however, could crop up in the future because Daisy/Cadnetix had been in financial straits for several years and had lost many key employees. When Intergraph sold Tangent Systems in early 1989, the company apparently left the electronic design market; with the Daisy/Cadnetix purchase, the company was once again in the running.

1990s: A Decade of Change

The year 1990 proved a decisive success overall: Intergraph reached $1 billion in revenue, becoming the second-ranked CAD/CAM/CAE vendor in the world and the first in North America. The company also scored a contract with Ameritech, the Midwest regional Bell company, for an estimated $7 million in new revenue over two years, with higher per capita revenue expected in subsequent years. Interestingly, just when Intergraph was riding high, criticism resurfaced. The New York state pension fund implicated Intergraph, as well as four other companies, in a drive to elect more outsiders to corporate boards of directors. Intergraph, however, had already selected a new president, Elliott James. Other criticism came from industry and financial analysts predicting a decline in Intergraph's stature. According to these critics, the corporation, although known for superior customer satisfaction, was not attracting enough new customers. While Intergraph doubled in size between 1985 and 1991, earnings were stagnant. Nevertheless, the company had virtually no long-term debt and continued to grow. Intergraph was second only to IBM in international sales.

Most criticism leveled at Intergraph stemmed from the fact that Jim Meadlock never seemed to do things like anyone else in the CAD/CAM industry, nor like any other hardware/software vendor. At a time when CAD/CAM providers were porting their software to two or more hardware platforms, Meadlock refused to do so. The company lost chances for several multimillion-dollar contracts this way, as Intergraph's Robert Glasier, vice-president of corporate marketing, freely admitted. However, as Glasier stated in Electronics: "All the software vendors are trying to get down to one or two platforms because they learned how much it costs to do more than that. We're already there."

Another unique aspect of the company was that while proprietary systems were thought to be dead, Intergraph's were still selling. In fact, in April 1991 the company was awarded a $362 million Navy contract, beating out tough competitors. Finally, Intergraph was involved in both hardware and software when such hopscotching was not deemed feasible or profitable. In spite of such criticism, Intergraph was riding another crest in the spring of 1991. Its stock was in demand, due in large part to the Navy contract that boosted earnings by $15 million that year.

Although Intergraph's success in building proprietary systems belied the prevailing theory that the market had dried up, Meadlock knew he could not expect to buck industry trends forever. A fundamental change in Intergraph's business strategy was needed to ensure financial growth in the long-term--and Meadlock knew it. In 1992, he decided to abandon the proprietary hardware aspect of Intergraph's business and concentrate instead on a standard-platform strategy, a transition harking back to the early years of the company. Meadlock decided the company would write its technical software applications to conform to Microsoft Corp.'s Windows NT operating system and to make Windows NT available on Intergraph workstations. "Windows NT was a defensive decision," Meadlock later remarked. At the same time, Meadlock announced that Intergraph would offer workstations tailored around Intel Corp.'s microprocessor. As the 1990s progressed, Microsoft and Intel achieved a dominant grip on the computer industry, with their software and chips becoming the ubiquitous industry standard.

Meadlock could not have picked two more powerful forces to build Intergraph's systems around than Microsoft and Intel, but the astuteness of his decision did not make the company's transition any easier. The new strategy embraced in 1992 touched off a troubled era in Intergraph's development, in spite of its historic importance. The costs resulting from the company's new product initiative were staggering, resulting in operating losses of $164.6 million in 1993 and $72.6 million in 1994. The downward spiral of Intergraph's operating income was further exacerbated by declining profit margins in the computer industry as a whole, as steadily declining retail prices for all types of computer equipment delivered the second blow of the one-two punch that sent the company reeling during the 1990s. In 1994, for instance, Intergraph sold 41 percent more workstations and servers than it did the previous year, yet workstation and server revenues crept up a mere four percent. For Meadlock, the situation was grave, but there was no turning back. The wrenching transition had to continue forward to ensure the company's long-term future.

Entering the late 1990s, Intergraph continued to struggle from the repercussions of its transition from proprietary, UNIX-based systems to the open environment of Intel and Microsoft. The company lost money in 1995, 1996, and 1997, while revenues remained virtually static. The answer to whether or not Intergraph's move away from proprietary systems ultimately would pay the dividends expected by Meadlock remained to be determined in the future, but it was clear that the company's previous approach was longer viable in the late 1990s marketplace.

Principal Subsidiaries: Intergraph Computer Systems; International Public Safety; VeriBest Inc.; M & S Computing Investments.

Intergraph Corporation History

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