After Huge Loss, IBM May Get It Together

Been down so long, it looks like up to me. IBM wrote off another $8.9 billion, more than $15 a share, announced a 54% cut in its dividend and the departure of 85,000 employees over two years.

Yet its stock went up $3.25 to $45.625, as investors hailed IBM’s new Chairman Louis V. Gerstner, who has been four months on the job, for taking stern action. But a new manager always gets a honeymoon.

Does the stock action only reflect emotion or is there reason to believe that IBM, a company that once sold for $175 a share, will now improve?

Yes, there’s reason, beginning with the immediate outlook for the mainframe computer business, the large machines that account for one-third of IBM’s $64.5 billion in sales and a good portion of its pretax profit. Mainframes are selling briskly. IBM has cut prices more than 50%, and customers have found smaller machines inadequate to many computing needs.

Also, IBM’s second-quarter figures, released Tuesday, showed it doing better in North America, while operations in Europe and Japan lagged. That’s a signal that earlier IBM restructurings, which hit more heavily in the United States and Canada, have been successful in getting costs down. Accordingly, the new staff cuts will attempt to shape up overseas operations, which give IBM 62% of its revenue.

But beyond the immediate outlook, investors cheered Gerstner because of action he has already taken in nixing a breakup of IBM along product lines. When Gerstner, a 51-year-old Harvard MBA and former management consultant, took over four months ago, he found plans to split IBM into nine separate companies--one for mainframes, another for personal computers, one for software, another for workstations and so on.

But Gerstner thought that was a silly idea. IBM is one of the only companies that can bring business customers total computing services anywhere in the world. To split it up would have been “suicidal,” says one industry consultant.

That’s why Gerstner was emphatic Tuesday, saying: “We are going to continue to be the only full-service provider in this industry.”

“IBM’s traditional strength was that customers could count on it,” computer consultant Kenneth Bosomworth of International Resource Development explains. “Years ago, big companies knew they were paying a 15% to 20% premium to buy IBM equipment. But it was worth it, because IBM provided service. The customers didn’t have to hire data processing professionals of their own.”

But the world changed. Customers began to complain that the computer giant’s salespeople often provided IBM solutions rather than the best solutions. Also, technology moved on, and customers wanted to have their own experts to develop computer capabilities specific to their industry and company.

So, IBM today faces a different marketplace. Gerstner’s approach is likely to be providing solutions for individual industries. “He wants to decentralize the marketing, so there will be an IBM for the banking business and an IBM for aerospace, and retailing and so forth,” says Bob Djurdjevic of Annex Research, a Phoenix computer analysis firm. But manufacturing, research and product development will remain centralized, so the company can get the benefit of large-scale operations.

Gerstner seemed to agree Tuesday. Recalling his years as head of American Express and RJR Nabisco, Gerstner said: “IBM was always the place to turn for the complete solution.”

But changing the computer giant won’t be easy. Since plans to split IBM into separate companies had gone so far, a lot of managers at the Armonk, N.Y.-based company were preparing to run their own outfit.

Now nobody is sure what’s going to happen and morale is low, as Gerstner acknowledged Tuesday. It would be hard for morale not to be low at a once-admired company that has been beaten continually in recent years. IBM, for example, sells more personal computers than anybody in the world. But IBM has difficulty making a profit on PCs because it cannot get its costs as low as its competitors.

But downsizing and cost cutting can turn those losses around. And IBM will very likely make a profit in 1994; Tuesday’s big write-off probably cut enough loss-makers to ensure that.

The real question is longer term. Can IBM remake itself? Probably it can, but it will take time. AT&T;, which broke up in 1984, stumbled for years before getting its act together recently.

In that regard, it’s smart to remember that the challenge to IBM is not really technological. The company has incredible research strengths. For example, IBM has already developed a voice-activated computer, which is now being shown in demonstrations. The trick will be to bring such wonders to commercial reality.

That’s why it’s really no drawback that Gerstner is a businessman, without formal computer training. Because the company, which was built by salesmen--Thomas Watson Sr. and Jr.--is a management challenge. A challenge and, as the stock market was saying Tuesday, an opportunity.

IBM Job Losses

Buffeted by a changing marketplace, IBM is struggling to stem massive losses and regain its footing in the competitive computer business.

IBM SHARES JUMPED... * Despite all the bad news, IBM shares jumped $3.25 to close at $45.63, a fraction of their peak * Wall Street apparently liked the idea of a single giant write-off that includes reserves for future layoffs and plant closings. Also, IBM’s operating results weren’t as bad as expected

WHILE EMPLOYMENT FALLS * The IBM work force peaked in 1985 1985: 406,000 End of 1993: 255,000 End of 1994: 225,000