Y2K Bug Takes Bite Out of IBM Shares

Investors hammered IBM with its biggest one-day stock drop since the crash of 1987 on Thursday, one day after the computer giant warned of a profit hit tied to the year 2000 bug.

Some analysts said the pattern will be repeated with other tech companies--though investors certainly weren’t treating most tech stocks that way Thursday.

IBM plunged $16 to $91, or 15%, on the New York Stock Exchange as more than 69 million shares changed hands on the warning that fourth-quarter and possibly first-quarter profit will be below year-earlier results as big customers delay purchases of mainframe and large server computers.

“Y2K finally got us. We tried to find a clear sign of a slowdown and we obviously didn’t dig deep enough,” Salomon Smith Barney analyst John B. Jones Jr. said.

IBM’s surprise announcement was one of the most serious so far to stem from Y2K issues. The Y2K bug refers to the potential for computers to mistake the year 2000 for 1900, triggering malfunctions.

Investors quickly pushed down other mainframe software and computer services stocks--in particular, Computer Associates, Computer Sciences and BMC Software. Sun Microsystems also dived.

“This is not just an IBM event,” said Rob Enderle, an analyst with Giga Information Group. “It’s likely to move across the market as we move through the fourth quarter.”

Slowdowns in “deployment of software, and the desktops and servers, are next,” he said.

Many big firms and agencies have barred the purchase of big computers until after the new year, in part because it would complicate testing of existing programs to make sure they are free of the bug.

“When you have interface testing going on, you absolutely can’t be there messing with the code. It turns into an infinite loop,” said George Kostyrko, a spokesman for the state of California’s Information Technology Department. The department has banned purchases of most new hardware and software between Nov. 1 and March 10.

Southern California Edison is also “locked down” from Nov. 15 to Jan. 15, Y2K director Eric Trapp said. “The vast majority of companies have instituted some kind of fix, so they don’t want to introduce any new potential problems.”

Still, some analysts--and some IBM rivals--suggested that Big Blue was attributing some problems to Y2K that have more to do with the competitive market. “There’s a lot more to it,” said analyst Amir Ahari of International Data Corp. “There were some issues about product strategy and execution.”

Hitachi, another top maker of mainframe computers, said some of its customers were buying even though they had official moratoriums on new purchases.

“We’re certainly not seeing the degree of slowdown that might be indicated” from IBM’s report, said Chris Worrall, Hitachi vice president for servers. “Many companies that were expecting to be in a solid freeze are suggesting they will continue installing hardware.”

Nonetheless, some Y2K experts say many more firms will find themselves experiencing a sales slowdown soon. “IBM is being honest,” said consultant Dick Lefkon, who taught a Y2K course at New York University. “What happened to IBM will no doubt happen to at least one-third of the common names in the software, hardware and consulting sectors.”

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IBM’s Effect: A Mixed Bag

IBM’s warning about weak earnings ahead because of customers’ Y2K fears hit some tech stocks Thursday, but many others were unscathed. A sampling:

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Thurs. Thurs. Stock close change IBM $91.00 -$16.00 BMC Software 53.00 -7.19 Computer Assoc. 52.88 -5.38 Sun Microsys. 92.88 -3.44 Computer Sciences 59.50 -3.00 Compaq 19.00 -1.19 Microsoft 93.06 +0.81 Apple Computer 76.13 +1.00 Intel 71.69 +1.75 Vitesse Semicon. 39.13 +2.38 America Online 122.25 +4.25

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Source: Times research