NEWS ANALYSIS : Break Up Big Blue? : A Growing Number of Experts Say Splitting IBM Is Inevitable
Despite frantic cost-cutting and a sweeping reorganization, International Business Machines has racked up $7.8 billion in losses over the last two years as it struggles to compete in a transformed computer industry. So what should Chairman John F. Akers--or his replacement if IBM’s losses cost him his job--try next?
Increasingly, many analysts are saying that the only logical answer is one that once would have been unthinkable: an outright breakup of the company, with individual business units being sold or spun off to shareholders.
“They are going to be split up one way or another, and it’s either going to be by design or by force,” says Charles Biderman, editor of the Market Trim Tabs newsletter. “The value of the pieces should be well over $100 a share, or double what it is today.”
The case for a breakup is straightforward: IBM has lots of good technology and lots of smart people. But its ability to compete in the lightning-fast computer business is crippled by bureaucratic decision-making and the unwillingness of different IBM units to compete with one another.
With thousands of small, highly focused competitors, IBM simply cannot afford to lose months, or even weeks, while product and marketing decisions wend their way through multiple layers of management. And as long as IBM’s personal computer unit, for example, cannot target IBM mainframe customers who might be considering switching to a network of PCs, it will be unable to compete effectively with the Compaqs and Dells of the world.
Akers has recognized the logic behind a breakup. In fact, the centerpiece of his long-term strategy is an effort aimed at giving the company’s 13 units more autonomy. He speaks of IBM becoming a “federation of companies” that have their own profit-and-loss responsibilities and, perhaps, outside shareholders.
But a year after the strategy was announced, the company still hasn’t begun breaking out financial results for the individual units. And managers still have little incentive to do anything that might damage other pieces of IBM since their careers are still bound by the fate of IBM as a whole.
The decentralization effort “is nothing more then verbiage,” scoffs Bob Djurdjevic, president of Annex Research in Phoenix. “They haven’t done any of the structural things needed to break it apart.”
T Djurdjevic says a financial analysis of the pieces of IBM shows that they would be far more valuable as separate entities. After estimating revenue and profit from five separate lines of business and assigning them a stock-market value based on what comparable rival companies are worth, he concludes that the profitable mainframe computer business alone would be worth more to shareholders than all of IBM is today.
If the special charges taken by IBM in 1992 are not included, he says, the mainframe business and associated software and services would have registered $2.64 billion in profits on sales of $21.1 billion. It would have had a market value of nearly $53 billion, compared to $27 billion for the whole company.
The mini-computer business would have earned $1 billion on sales of $12.8 billion and had a market value of $14.1 billion. The disk-drive operation would have made $299 million on sales of $7.6 billion and had a market value of $3.6 billion.
Printers and personal computers, on the other hand, were big money losers, with the personal systems group recording a $500-million loss on sales of $9.1 billion.
Some of Djurdjevic’s assumptions might be overly optimistic: The mainframe business, for example, is valued according to the share prices of mainframe companies in the 1980s, before it became apparent how much damage smaller computers would do to that business.
And some analysts argue that a breakup would destroy whatever competitive advantages IBM might hope to gain by virtue of its broad technology portfolio.
“A lot of the long-term value is that, someday, the personal computer division may have access to (superior) technology from the semiconductor division,” says John Jones, an analyst with Salomon Bros. “There are lots of interrelationships from a technology standpoint. Do you want to just be a PC clone company?”
Jones says there are a few IBM units, notably the printer division, that the company might be better off selling. Beyond that, he believes that Akers’ “federation” approach is on target, though the benefits won’t become clear until after the global economy improves.
For similar reasons, Richard Shaffer, publisher of the PC Letter, believes that the arguments for a breakup are specious. “This is a great bandwagon that is being pushed by IBM’s competitors,” he says. “If I were Sun (Microsystems, a competitor in the workstation market), I would love to see IBM broken up.”
Proponents of a split-up point out that IBM is the only company in the computer industry that tries to compete in every aspect of the business. They
But Shaffer says “just because no one else is doing it, doesn’t mean that IBM shouldn’t.” And he adds that even if IBM’s units were split up, they would still be run by managers steeped in IBM’s culture and lacking the technical savvy of competitors like Bill Gates of Microsoft and Andrew Grove of Intel.
Still, there is one example of what IBM might achieve by carving up itself. Two years ago, IBM sold its typewriter and low-end printer division to managers and investors in a leveraged buyout. The company that emerged, Lexmark International, has been far more successful and profitable than even the buyers anticipated.
Even if the decision is made to split up IBM, it would take time. Securities and Exchange Commission rules dictate that firms cannot be spun off to shareholders until they have three years of audited financial returns. So even the most radical solution hardly amounts to a quick fix of IBM’s problems.
