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IBM FINANCIAL

A Well-timed Exit by IBM Chairman and CEO

Gerstner’s Legacy: Good Manager, Poor Entrepreneur

Don’t Expect Any Radical Changes from Palmisano; IBM to Coast in 2002

PHOENIX, Jan. 29 - “The king is dead; long live the king!”  Well, not quite.  But IBM did make it official today.  The company announced that Lou Gerstner (59) will be stepping down as CEO on March 1, when he turns 60, and as chairman at the end of this year.  Big Blue also said that Sam Palmisano (50) will be taking over.

No surprise there.  Palmisano has been Armonk’s “lady-in-waiting” for a long time (for example, see “Waiting to Call Plays for IBM,” the New York Times, Aug. 15, 2001, the Wall Street Journal’s May 18, 2001 story).  Yet, coupled with Enron-related accounting fears, the IBM succession news drove the Big Blue stock and the market down (IBM was down 5% or $5; while the Dow Jones declined 2.5%, or 247 points). 

Of course, that’s not fair to Palmisano, a “nice guy” who will likely transform IBM into a “kinder, gentler place.”  But who says Wall Street is fair?  If it were, would IBM stock be anywhere close to the level it is trading now?

So what kind of a legacy is Gerstner leaving behind, after nearly nine years at the IBM helm?  Well, he’ll be remembered as a good manager, but a poor entrepreneur. 

Gerstner did an excellent job of cutting costs and returning IBM to profitability.  That job was done by about 1995.  Ever since, his main challenge was to generate growth.  He did poorly at that.  As the IT industry growth exploded around the Internet-driven ventures, IBM recorded a mere 2.5% compound annual growth in the last five years (1996-2001), and only 3.2% during his entire nine-year tenure (see the charts and tables).  That makes Gerstner’s growth record the worst of any IBM CEO… (yes, even worse than John Akers’ 4.3% - see the chart).

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Making things even worse for Gerstner’s legacy, IBM revenues actually declined in the fourth quarter (down 11%), and for the full year 2001 (down 3% - see “Big Blue to Take a Dive,” Annex Bulletin 2002-2, 1/17/02). 

Which means that Gerstner’s exit is well-timed.  From now on, it may be all downhill for Big Blue (not a participant in this Winter Olympics skiing event J).

So maybe Wall Street is right, albeit for wrong reasons?  Maybe the five-point drop in the IBM stock suggests that Palmisano should be receiving condolences, not congratulations?

Nah… don’t count on such prescience on the cashflow-driven Wall Street.  The Big Blue stock will probably bounce right back up tomorrow.  Or the next day… when memories of underwhelming Gerstner legacies fade.

Stock Surge - Greatest Legacy

After all, it is in the IBM stock price rise that Gerstner’s greatest achievements lie.  Since Gerstner took over on Mar. 31, 1993, the IBM stock has surged by 710%, 3.7 times faster than the DJI average of which IBM is a part.  And since IBM went on a stock buyback binge in 1996, the Big Blue stock has outperformed even the Dow Jones Industrial (DJI) bulls even by a wider margin (IBM is up 316% since June 1996 - 4.5 times faster growth than the 70% DJI index increase - see the charts and tables).

To be sure, IBM earnings also rose during Gerstner’s tenure, but nowhere nearly as much as the company’s market capitalization.  In fact, by the time all is said and done, the net margin during Gerstner’s time on the Armonk throne is only slightly higher than that of the loss-riddled Akers era (5.8% vs. 5.1%).  And it is less than half of the net margins achieved by their predecessors (John Opel, Frank Cary, Tom Watson… all had net margins in the 13% to 14% range to their credit).

So if Gerstner had the worst revenue growth record, and the second worst profit margin of any IBM CEO, how did he manage to grow the IBM stock price, especially by as much as 710%?

Good question.  The answer, of course, lies in the current stockmarket perversions, and the collusion of Wall Street and Armonk interests. 

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To be sure, Gerstner has paid dearly for creating the illusion of prosperity.  IBM has spent $44 billion of its shareholders’ money on stock buybacks, instead of investing it in the business (see “Big Blue to Take a Dive,” Annex Bulletin 2002-2, 1/17/02).

And IBM and its shareholders may yet end up “paying” some more, if the current post-Enron atmosphere of accounting vigilance leads to additional scrutiny of Gerstner’s “financial engineering” endeavors over the years.  “Creative accounting” is probably the only “entrepreneurial activity” in which the outgoing IBM CEO has engaged during his time at Armonk.   Enough on legacy…\

Lou Knighted, Blue (De)lighted

Outlook: IBM to Coast?

What about the outlook under IBM’s new leader?  Well, one thing is for sure… there will be a change in style.  A gregarious and personable executive, Palmisano is likely to be perceived as a breath of fresh air compared to Gerstner’s stuffy, imperial demeanor (see “Louis XIX of Armonk,” Aug. 26, 1996). 

What about beyond management style?  Is Palmisano likely to carry out some badly needed radical reforms at IBM? (such as break it up - see “Break Up IBM!”, March 1996, and "What's IBM Really Worth?", Forbes, Nov. 2000).

Don’t hold your breath for it.  If Palmisano were not always “politically correct,” he would not be ascending to the Big Blue throne right now.  He’d be were all other “radical thinkers” in Gerstner’s Armonk ended up - out in the street.  And since Gerstner is going to be looking over Palmisano’s shoulders till the end of the year, it is unlikely that the new CEO would try to make some radical changes, even if he had had it in him (which is a big IF!).

So stand by for IBM coasting and Palmisano treading water this year.  Unless, of course, something dramatic happens in the marketplace (like Sep. 11) that would dramatically alter the backdrop against which Palmisano and IBM must operate.

“IBM Broke the Law”

What happened today in San Francisco is perhaps not quite as dramatic, but is nonetheless telling of certain kinds of trouble Gerstner’s IBM is getting into that probably has the elder Big Blue statesmen (the Watson’s) turning in their graves. 

IBM agreed to pay a fine of over $100,000 to City of San Francisco to placate its enraged officials, according to a Jan. 29 Reuters story (see “IBM Pays Fine for San Francisco Graffiti Ads”).  “IBM broke the law,” Gavin Newsom, San Francisco Supervisor, told Reuters. 

Under a deal approved on Tuesday by San Francisco's Board of Supervisors, IBM and two of its advertising agencies, Ogilvy & Mather and Mindshare, will pay the fine to avoid possible criminal prosecution.

IBM and the two advertising firms agreed to split the $20,000 cost of the clean-up as well as a $100,000 donation to the city's Clean City Coalition program, officials said.

The campaign promoting IBM's “Peace Love and Linux” campaign left black-stenciled graffiti depicting a peace sign, a heart and a penguin at dozens of locations around the city.

City officials said the ads were a form of vandalism and threatened criminal action.  IBM paid up the hush money.  What’s the business world coming to?

Happy bargain hunting!

Bob Djurdjevic






 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Volume XVIII, No. 2002-03
January 29, 2002

Editor: Bob Djurdjevic
Published by Annex Research
e-mail: annex@djurdjevic.com

P.O. Box 97100, Phoenix, Arizona 85060-7100
TEL/FAX: (602) 824-8111

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