To Shine Amid Fireflies, IBM Must Change
Is IBM a good investment? That’s a question that many people are asking as the computer giant’s stock closed Tuesday at $106 a share, about as low as it got when the market crashed two years ago.
IBM stock has fallen $10 a share in the past week, the equivalent of $6 billion in market value, because the company said third-quarter earnings won’t measure up to Wall Street expectations.
But the market’s real concern goes beyond a single quarter to long-term worries about IBM--a bellwether company in many ways.
In terms of the market value of its stock, International Business Machines at $65 billion is the largest U.S. company.
By many other measures, it is arguably the most successful American company. It is the largest computer maker in the world, at $60 billion in sales. And it succeeds everywhere, with more than half its sales and almost three-quarters of its pretax profit coming from outside the United States.
IBM doesn’t sacrifice long-term goals for short-term profit. Rather, it spends $6 billion a year on research and development and puts its talents to good use: IBM’s writing-to-read computer program, to cite one example, teaches kids and adults to read all over the world.
But even the best companies can’t avoid the pain of change. In the past three years, IBM’s sales growth has slowed, compared to the first half of the decade. And IBM has become less profitable: Its return on shareholders investment, traditionally more than 20%, has been less than 15% a year; IBM says its earnings could be down again this year.
Advances in Chips
Which brings us back to the question: Is IBM a good investment? Probably it is, but to make a judgment you need to understand the challenge facing the company. In a sense, it’s not a slowing of the computer industry that’s the problem, but the speeding up. Change is moving ever faster, and IBM must dance to keep up.
The causes of that speedup are advances in microprocessors--the brains on a chip that have brought to the desktop computer the power that used to be stored in a roomful of big machines.
IBM’s great strength was devising and selling those big computers. To be sure it also leads the market in personal computers, but with nowhere near the dominance it holds in large computers.
More important than market share in any case is constant change. A new computer generation dawns every 18 months these days, driven not by IBM but by microprocessor chips made by Intel and Motorola. As an example of what is happening, on Monday IBM announced proudly that it was first to market with a computer able to use the Intel i486 chip. Yet that gives IBM only a brief edge over 200 other makers of personal computers.
And if it isn’t chips driving the competition, it’s special software programs for engineers, or for airlines--for specific uses. IBM finds itself competing with companies that may not be here five years from now, but can steal a customer today. It’s like catching fireflies.
Willing to Share
How does the company cope? By being flexible, for one thing. IBM, which spends massively to develop its own semiconductors and software, also spends on technology from others. It has an agreement to support Steven Jobs’ new computer, from his company Next Inc., because it may be able to use Next’s operating system; on Tuesday, IBM brought out a software program based on the work of an American Telephone & Telegraph scientist.
It has no hang-ups about licensing the work of others. “A computer is nothing more than a package of the latest technology,” IBM President Jack D. Kuehler, an engineer and noted technologist, explained in a recent interview. “It doesn’t matter if you have scientists working on the greatest breakthrough. If somebody else packages the latest chips and software and brings out a product first, you’re behind.”
That’s a healthy competitive attitude, but some analysts question whether the company is capable of changing as much as it may need to. “They need to cut perhaps 10% to 20% of their work force,” says analyst Barry Tarasoff, of the Wertheim Schroder investment firm. That would mean cutting 39,000 to 77,000 people. IBM, which is again offering early retirement to some employees as it did two years ago, may shy from that.
Yet the company is aware of the need to change and will probably do so. Says Silicon Valley consultant Regis McKenna, author of “Who’s Afraid of Big Blue?” a book on the new computer landscape: “I’d bet that five years from now, you won’t see the same company.”
Yes, but is IBM a good investment? Over five years or so, almost everybody agrees that it is. Gary Smaby, of Smaby Inc., a Minneapolis-based consultancy, sums up the consensus: “If you’re saving to send kids to college or for retirement, over five years, you’d be hard pressed to find a better company.”
