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IBM's 1997 Annual Report Reads Like a Hollywood Script

Wag the Big Blue Dog


Real Life (Mediocre Economic Performance) Yields to Rosy Perceptions;Producer: IBM Hollymonk Studios, Armonkwood, New York

A dog wags his tail, rather than the other way around, because the dog is smarter than his tail, claims the script of a Hollywood hit movie, "Wag the Dog," featuring Dustin Hoffman and Robert DeNiro. The film's political message, frighteningly close to real life these days, is that the producers can play God at will with the American masses dumbed-down over the decades by electronic images. Hollywood can see to it that real life conforms to its fantasies and interests.

Enter Lou Gerstner's IBM Hollymonk Studios. Whoever said that fiction and soap are only created on the West Coast? IBM's 1997 Annual Report, scripted and produced by the Big Blue's Armonkwood-based crew, owes nothing to the Hollywood or Disneyland producers. It elevates glitz over substance; words over deeds; and fiction over reality.

Which only goes to prove that the famous elitist "New Yorker" magazine cartoon - the one which depicted Los Angeles on the western bank of the Hudson River - has finally some to pass in the virtual reality America. Wall Street's money and Hollywood's imagination have combined to wipe out the rest of the country between Manhattan and LaLa Land. The IBM Hollymonk's "Wag the Big Blue Dog" production reinforces this point.

"IBM's market valuation - the ultimate measure of our performance - grew by $23 billion in 1997," IBM CEO, Lou Gerstner, boasted in his "Chairman's letter."

So the Wall Street Casino, which trades on perceptions, not facts, is "the ultimate measure" of a company's performance, according to the Big Blue's chairman? Hm...

Wonder why we had not heard this kind of rhetoric from IBM when its stock was in the doldrums? No, we are not thinking of the Akers era. Even as late as July 1996, over three years AFTER Gerstner became IBM CEO, the IBM stock was only HALF of its recent price ($53 vs. $106).

So what has changed since then? Did the company's revenues and earnings suddenly explode?

Nope. The 1997 revenues and profits were both up only 3% over 1996. And the 1997 earnings were actually DOWN 4% if adjusted for the lower tax rate.

So what has changed since 1996 is Wall Street's PERCEPTION of IBM? How did IBM manage that?

Easy. The IBM Hollymonk created an illusion of prosperity by buying back its stock. In 1997 alone, the Big Blue spent $7.1 billion on stock repurchases - MORE THAN ANY OTHER INVESTMENT the company had made, and more than IBM earned last year ($6.1 billion).

 Since the start of the buyback program in 1995, the company has now spent some $18 billion on such economic perversion - WITHOUT CREATING A SINGLE JOB OR PRODUCT! (also see Annex Bulletin 98-04, 1/20/98).

Who says that the "Titanic" was the most expensive movie ever made? The "Wag the Big Blue Dog" was over 70 times more costly! But it took gullible "movie-goers," the investing public, to buy IBM Hollymonk's illusion of prosperity, and give such a grand delusion a real life meaning. The ultimate irony is that stockmarket paper gains can disappear as fast as they are made. But the $18 billion of IBM shareholders' real money is now gone forever.

IBM, Real Life Story

And now, contrast the preceding IBM Hollymonk "Wag the Big Blue Dog" soap with IBM, the real life story in 1997:

  • EQUITY was down by $1.8 billion;
  • CASH was down 7%;
  • CASHFLOW was negative ($581 million);
  • Core ASSETS were down 8%;
  • Core DEBT was up 41%;
  • REVENUES were down in five of IBM's seven business segments:

SERVERS - down 4.5%;

CLIENTS - flat (-0.1%);

PERIPHERALS - down 5%;

SOFTWARE - down 2%;

MAINTENANCE - down 8%;


Only SERVICES and OEM hardware revenues increased (22% and 23% respectively). But alas, these two segments carry relatively low gross margins. So, on we go with IBM's 1997 real life story...

GROSS MARGINS were down 1.2 points to 39%, following a two-point decline in 1996.

IBM's global SERVICES won $24 billion-worth of new contracts in 1997 - an impressive figure, except that it was down from $27 billion in 1996. Which meant that IBM lost market share to EDS, which closed $16.3 billion of new business last year, up from $8.4 billion the year before - an $11 billion swing in EDS' favor!

Finally, as you've already seen earlier, NET EARNINGS were also down 4% when adjusted for the lower tax rate.

In light of the above FACTS, Gerstner's self-aggrandizing "Ode de Success" tune (in his 1997 letter to the IBM shareholders) sounds a bit off key. "Our customers and business partners are looking for someone to lead, and we intend to do it," he said.

Lead? With results like that? Such a request must have come from people, such as Gerstner's Fortune/Forbes 500 "Dino-pals" (see Annex Bulletin 96-42, 8/21/96), to whom mediocrity sounds like heaven compared to oblivion.

No wonder even IBM's ebullient chairman let his guard down when he wrote, "a 40,000-foot view (presumably his - in one of IBM's corporate jets?) doesn't really tell the story - where the growth will come from and why, and how we plan to return IBM to industry leadership."

Notice something incongruous here? Given IBM's mediocre performance, Gerstner is correct in talking about the growth in a FUTURE tense ("will come"). And he is admitting that IBM is no longer the industry leader since the IBM CEO plans to "return" the Big Blue to industry leadership.

Well, if Gerstner hasn't done it in the five years he has been at the IBM helm, what makes him think that he can do it in the next five? Or the next 50?

But those are evidently not the kinds of questions Gerstner's cronies had asked (whom he had appointed to the IBM Board - talk about corporate incest!), before giving him two million shares as stock options last November with an estimated value of over $80 million based on current prices. And this was on top of some $95 million-worth of stock options which the IBM CEO had received since joining IBM in 1993.

The message? Mediocrity pays. Handsomely. If you know how to stroke the Wall Street institutional shareholders.


As for the Main Street ones...

Which Main Street ones? Don't you see the Los Angeles skyline across from the West Side Highway? Main Street is merely the plumbing below.

"Gimme a bridge, will you?" an impatient IBM Hollymonk producer yells at his compugeek.

The technician punches up a few commands on the keyboard and a big bridge across the Hudson fills the screen.

"Make it a double-decker."

A double-decker bridge it is.

"Put some traffic on it."

It's done. Along with noise, swearing, and drive-by shootings.

"Call it GW."

"Call it what?"

"George Washington, moron! The Main Street masses still fall for that kind of patriotic soap."

A large GW logo appears on the bridge.

"Make it glow at night in neon colors"

It is done.

"Now, let's see... I've got this bridge I'd like to sell you, Main Street America," the Armonkwood producer now goes himself on camera rehearsing his sales pitch. "It runs between GaGa Land and LaLa Land. Its name is George Washington. Its color is blue. Big Blue, that is..."

"Wait a second... I am not finished! Why are you running away?"

Happy bargain hunting!

Bob Djurdjevic

P.S. In "Wag the Dog," the Hollywood movie, the producer ends up with "a massive heart attack." The IBM Hollymonk Studios screenwriters and producers of "Wag the Big Blue Dog" can ignore the not-so-hidden message from Hollywood only at their peril. For, there may be quite a few irate IBM shareholders gunning down for the Armonkwood-based producers (yes, the same ones who staged the "Five-Ring Circus" at the Atlanta 1996 Olympics) when the whole truth eventually comes to light. And it always does... Heart attacks and all.

Additional Charts

  • "Wagging the Big Blue Dog" - an IBM stock chart
  • IBM Loses Share to EDS in '97
  • IBM '97 Revenue Segments
  • IBM '97 International Revenue Segments


  • IBM Business Segment Report - Worldwide
  • IBM Business Segment Report - U.S.A.
  • IBM Business Segment Report - International
  • IBM Business Segment Revenue Shares
  • IBM Historical Stock Prices - Dec/94 to Apr/98

Also, check out the "the new blue" Annex Bulletin.

Annex Research is a well respected consulting firm serving the information needs of today's senior IT executives, for over 28 years. For more information please call 602/824-8111.

Volume XIV, No. 98-14
March 28, 1998

Editor: Bob Djurdjevic
Published by: Annex Research

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