$8-Billion Loss Posted by IBM; More Layoffs Set
Hoping to cure itself with one last, huge gulp of bitter medicine, IBM on Tuesday announced an $8-billion second-quarter loss and the elimination of 35,000 more jobs by the end of 1994.
IBM’s loss, the second-biggest by a U.S. company in a single quarter, arises mainly from $8.9 billion in extraordinary charges to cover layoffs, plant closings and other current and future efforts to shrink the struggling company. The record was GM’s $21-billion loss in the first quarter of 1992.
At the end of last year, International Business Machines Corp. had about 300,000 employees, down from more than 400,000 in 1986. It has eliminated 50,000 jobs since December, and the company said the new round of cuts will include layoffs and will involve a greater proportion of workers in foreign countries than before.
“We have to get behind us the Chinese water torture we’ve been going through, quarter after quarter and year after year,” said IBM’s new chairman, Louis V. Gerstner Jr., referring to earlier restructurings and losses.
Gerstner, however, defied expectations by saying that he has no immediate plans to set forth a new vision for the long-troubled computer giant, which has been humbled by the declining market for mainframes, its core product.
“The last thing IBM needs right now is a vision,” he contended.
Instead, Gerstner said he will address the elemental need to return to profitability by developing individual market strategies for each of IBM’s businesses.
In a move to conserve cash, IBM also slashed its quarterly dividend payment to 25 cents per share from 54 cents. It was IBM’s second dividend cut this year.
Gerstner, who succeeded John Akers in April, had been expected to disclose a big write-off as a sign that he is taking bold action to stem the company’s losses. Akers and earlier IBM managers were blamed for taking a drawn-out series of half steps. But the $8.9-billion charge exceeded even analysts’ predictions, which had ranged from $2 billion to $8 billion.
Despite all the bad news, IBM shares jumped $3.25 to close at $45.63 in New York Stock Exchange trading. The stock hit $42.25 on Friday, a new 18-year low, and analysts said the market had already factored in expected bad news about charges and a dividend cut.
On Tuesday, the market apparently saw a silver lining. For one thing, Gerstner said IBM’s restructuring measures will save the company $4 billion a year beginning in 1994. And not counting the huge restructuring charge, IBM would have reported a net loss from operations of just $40 million, or 8 cents a share--less than analysts predicted.
(Including everything, IBM’s $8-billion net loss comes to $14.10 per share, compared with a profit of $734 million, or $1.29, a share, in the second quarter of 1992. Revenue fell 4.3%, to $15.5 billion.)
Analyst Bob Djurdjevic, president of Annex Research in Phoenix, said Gerstner was wise to take a massive write-off now. “What they did with this write-off was create a reserve for restructuring at a time when it was acceptable to the market. I’d be surprised if they could identify more than 10% of the items (that will be cut), but they have a reserve for the future.”
Gerstner, however, acknowledged that this will be the write-off to end all write-offs only if IBM’s current web of assumptions and predictions--about the global economy, computer prices and demand for IBM products--holds.
IBM also announced changes to its board of directors, including the departure of Stephen D. Bechtel Jr., 68, former chairman of Bechtel Corp., and J. Richard Munro, 62, chairman of the executive committee of Time Warner Inc. IBM named one new director, Charles F. Knight, 57, who is chairman and chief executive of Emerson Electric Co.
When Gerstner was brought in to resuscitate the fallen giant, there was speculation that he might decentralize, spinning off from Big Blue a series of semi-autonomous Baby Blues. Some critics also urged that the company’s vast sales force, now divided up geographically, be reorganized along product lines.
But Gerstner indicated Tuesday that there would be no massive decentralization. And he said there would be no immediate radical rearrangement of the sales force, in part because many clients said they wanted IBM salespeople familiar with a broad range of products.
Gerstner gave few details of his ad hoc approach to returning IBM to profitability. He said it consists of getting IBM to develop “a series of market-driven, very tough, highly effective market strategies for each of its businesses.”
Gerstner acknowledged that there is a serious morale problem among employees. But, in a press conference beamed live to employees throughout the United States, he said the best remedy is major steps like those announced Tuesday, designed to return the company to profitability.
Charles Ferguson, a computer industry consultant and co-author of the recent book “Computer Wars,” faulted Gerstner for not specifically addressing key business issues. “IBM doesn’t have much time,” he said. “I don’t see them doing anything effective to capture control of the market for the hardware and the software that will replace mainframes and minicomputers.”
But Mark Stahlman, president of New Media Associates and a longtime IBM critic, said Gerstner has set a necessary tone, emphasizing getting back to work rather than agonizing about the company’s lost glory.
“The principal problem IBM has today is that it’s been so demoralized that it’s impossible to judge what businesses it should stay in and what executives should remain,” he said. “Gerstner has no good data on which to base those decisions. So this is a phase one, getting the company back to work and targeting the December quarter.”
Paltrow reported from New York and Weber from San Francisco.
