Facing weak sales growth and stubbornly high costs, International Business Machines Corp. said Tuesday that it will pare its U.S. work force by 10,000 employees, scale back some operations and take a $2.3-billion charge against fourth-quarter earnings.
The world's largest computer maker, which expects to save $1 billion a year from the moves, also said its board has approved the buyback of up to $4 billion worth of its stock.
"While it's no news that our industry is undergoing fundamental structural change--that it is under stress, some would say turmoil--the stresses have been building in recent months," IBM Chairman and Chief Executive John F. Akers told analysts at a morning meeting in Manhattan.
The work force reductions are said to be the largest in the computer industry so far this year, following staff cuts by such other industry giants as Unisys, Prime Computer, Digital Equipment, Wang Laboratories and Cray Research. As many as 30,000 computer industry jobs have been slashed this year amid a deepening slump, analysts estimate.
IBM's $2.3-billion charge also is one of the largest such quarterly writeoffs in U.S. corporate history, although still less than half the size of American Telephone & Telegraph's massive $5.5-billion writedown in the fourth quarter of 1983, related to the breakup of the Bell telephone system.
IBM's staff cutbacks will be accomplished by limiting new hires and offering severance packages to employees willing to quit their jobs, rather than through layoffs or plant closings, Akers said. He said IBM is holding fast to its 40-year-old policy of no layoffs, although "it is impossible to guarantee it in all and any circumstances."
The staff cuts, which have been expected for some time, represent about 4.6% of IBM's domestic work force of 216,000. Combined with two other cutback programs undertaken since 1986, the reductions will have pared IBM's U.S. staff by 37,000, or 15%, since 1985. (The company's worldwide payroll has shrunk 5.5%, to 383,000 employees, in that period.)
Wall Street has been hoping for dramatic cost reductions, and many analysts said they felt more cuts--including layoffs--were needed. "Ten thousand people doesn't impress me much," said Ulric Weil, an industry analyst in Washington. "They need 35,000 to 40,000 to start getting costs in line."
Apparently reflecting Wall Street's disappointment, IBM stock rose only 37.5 cents a share, to $99.625, on heavy volume of 2.2 million shares Tuesday in New York Stock Exchange trading. The stock, the most widely held in the United States, had been more than $170 per share before the October, 1987, crash.
IBM is trying to cope with a variety of problems, including late delivery of several key new products, its weakness in some fast-growing industry segments and soft demand for the large-scale computing equipment that is its specialty. The company shocked Wall Street in late September when it forecast lower third-quarter earnings that later turned out to be 30% below those of the 1988 quarter.
The payroll cuts will come largely from support jobs, officials said. The reductions will be distributed broadly across the company's approximately 600 U.S. locations. IBM officials, who said no plants will be closed, wouldn't identify which sites are likely to sustain the biggest cuts.
Officials expect the staff cuts will be largely completed by the middle of next year.
IBM employs 5,500 in Southern California and 18,000 throughout the state as a whole. Thus, if the payroll cuts are proportional, they will cost about 250 jobs in Southern California and about 800 statewide.
Most IBM employees in Southern California are in marketing, sales and service. The company has no manufacturing in the region, a spokeswoman said.
In his prepared remarks, Akers did not mention IBM's late deliveries, but he stressed the industry's overcapacity and slowdown in demand. He said industrywide sales, which grew 15% a year for 25 years, have slowed to 8% to 10% a year for the past three years, with the fastest growth coming outside the United States.
"Competition is intense and increasing, with pressure on prices, earnings and margins," he said.
Akers forecast that IBM's domestic operations would see "substantially improved performance" next year, although he declined to be more specific about the size of the gains.
IBM said its "separation pay" program will offer eligible employees one week's pay for each six months of service, up to a maximum of one year's pay. Analysts, some of whom have faulted IBM for spending too much on severance and early retirement programs, noted that a severance package offered to some employees last year provided a maximum of two years' pay.
Also included in the cost-reduction package are several changes in accounting practices that are designed to make the IBM organization more cost-conscious.
Rather than amortizing development costs over a decade or longer, those costs will now be charged within five years or less. Similarly, non-cash charges entailed in acquisitions and joint ventures--so-called goodwill charges--will not be spread out over long periods as they have been in the past.
The accounting changes "mean costs are going to show up immediately on the bottom line, and that should have a big impact on the thinking of line managers," said Charlotte Walker, vice president of County NatWest Securities in New York.
Frank A. Metz, IBM's chief financial officer, said $500 million of the $2.3-billion charge will cover the cost of some of the accounting changes, another $500 million will cover costs of the separation payment program, and the remaining $1.3 billion involves the cost of consolidating businesses, reducing capacity and taking charges relating to the company's joint ventures and business alliances.
The $2.3-billion charge will cut IBM's fourth-quarter earnings by $2.25 a share.
Barry Tarasoff, analyst with the Wertheim Schroder brokerage in New York, said the $1-billion in annual savings would not go far in bolstering IBM's results in a difficult time. "If they lose 1 1/2 points on their (profit margin), it will cancel that $1 billion right out," he said.
Tarasoff said sharper work force cutbacks were the only way to substantially reduce costs because 45% of IBM's costs are in its payroll. He forecast the company's U.S. revenue will grow 4% to 5% next year.
IBM earned $5.81 billion, or $9.80 a share, on revenue of $59.68 billion in 1988. Many analysts have been estimating the company would earn between $9.25 and $9.50 a share this year, and $10 a share or less in 1990.
The stock repurchase plan, which was approved by IBM's board, will extend a 3-year-old stock buyback program that has already spent about $6.5 billion. Metz said about one-third of the money used for the purchases will come from borrowings.
IBM has engaged in a number of job-cutting programs since 1986. In September, 1986, Big Blue announced retirement incentives that were accepted by 15,000 employees. In June, 1988, the firm announced "separation incentives" that 7,000 employees accepted. In September, IBM offered separation incentives to employees in selected skill groups; between 600 and 1,000 are expected to accept.
IBM AT A GLANCE
The Armonk, N.Y., firm is the world's largest computer company.
Year ended Dec. 31 1988 1987 Revenue (millions) $59,681 $55,256 Net income (millions) $5,806 $5,258
Shares outstanding 578,775,584
12-month price range $96-$130.875
Tuesday close $99.625