Those who have read Lou Gerstner’s new book, “Who Says Elephants Can’t Dance,” have a pretty good idea about what the former IBM chairman thinks of himself.  Those who are interested in learning what kind of a man he really was/is, should read on. 

What you’re about to learn includes much information never before published.  That’s because this is more a human interest than a business analysis story.  “Gerstner: The Untold Story” is based on this writer’s diary notes from several meetings and conversations with and about the former IBM chairman in the 1993-1996 period.  At the time, we had many requests from the media and even from some senior IBM executives for such information.  But we chose to hold it back because it wasn’t directly relevant to IBM’s business strategy.  Yet it could have been easily misused for political purposes by both Gerstner’s fans and detractors.

In order to place this story in a proper historical context, we recommend that you also check out “Gerstner Spills the Beans… Unwittingly” (Dec 13), along with many links within that article to related stories.  Of special significance as a preamble to this story are the articles that reflected our early 1993 views of Gerstner’s suitability for the top IBM job vs. his predecessor (John Akers - see “A Nice Guy Who Lost His Compass”, Jan 26, 1993, and “Akers: The Last Emperor?”, June 1991). 

The short of it was that we welcomed an outsider to the Armonk throne.  We felt such a leader would be less tempted to meddle in day-to-day management of the business, and would act as a business architect and visionary.  That’s something we felt IBM sorely needed at the time. 

As you take this journey with us down the memory lane, “Gerstner: The Untold Story” will hopefully let you see how our expectations gradually changed, as we got to know the real man in the top Big Blue job.

Throughout this story, we have tried to preserve the originality of our observations as contemporaneously written in this writer’s diaries, some almost 10 years ago.  These notes are shown in navy blue typeface.  We’ve only corrected some typos and made a few stylistic changes.

The First Meeting

ARMONK, May 27, 1993 - It was a beautiful spring day in Westchester County.  The Big Blue Armonk “castle” on Old Orchard Road was sparkling in warm sunshine when I arrived for my first meeting with the new IBM boss, Lou Gerstner.  I had been told by my Armonk handler (“XX” in the story) that I was the first and the only IT consultant with whom the new chairman and CEO was meeting at this point of his IBM career (he had been less than two months in the job). 

Nevertheless, I decided to play it by ear, as I do in all of my meetings.  I carried in my breast pocket a short list of points that I had jotted down the previous night at my hotel room as possible discussion topics.  But I never took it out during the meeting.  It was only afterward that I scanned my notes to see how much of the ground we actually did cover.  And recall being pleased to be able to check off most of the points.

The Entrance

I was met in the lobby by Stephanie Guff (sic), who had been one of John Akers' assistants, too.  She said she'd seen my name in the press many times, and was happy to meet the person behind it.  She pronounced my (difficult) last name so beautifully that I complimented her on it. 

We walked up to the third floor corner office.  Stephanie asked me if I would wait in the elegantly furnished "waiting office" while she announced me to Gerstner.  The office had four white-upholstered armchairs.  I noticed a copy of a large picture book on Russia on the table.  Right beside it was a magazine with a word "Bosnia" splashed across its cover. 

Just as I was about to pick it up, I heard a voice behind me saying, "Hi, I am Lou Gerstner." 

I turned around.  In front of me was a rather short man.  I could not help but think of Napoleon.  Gerstner wore a white shirt.  His initials (LVG) were embroidered on his shirt pocket. 

Surprise Greeting

I was surprised not only by the fact that Gerstner showed up so quickly, but that he did so in person.  Other IBM executives, even those whom I know well, might have waited in their offices for the guest to be shown in by an assistant.  IBM's new chairman obviously wanted to do it himself. 

"I am pleased to meet you," I said smiling as we shook hands. 

He just nodded coldly and pointed the way into his office. 

His abrupt mannerism seemed at odds with the description of others who have dealt with him.

IBM chairman's office furnishings were a matching set to those in the "waiting office" -- white upholstery armchairs and a large sofa.  Gerstner offered me a seat on the sofa.  He and XX took the armchairs.  "So, what is ANNEX?" he asked abruptly, demonstrating intent to dominate the conversation and eliminate any small talk. 

Users vs. Customers

"Okay, I thought to myself, if that's the way you want to play it.... I've been there before..."  I smiled as if he had said the nicest thing in the world about me, and proceeded to explain our business to him. 

As I was describing our four client constituencies (vendors, Wall St.,  leascos/banks, users), he interrupted me: "Users?  What's that?" 

"These are your customers," I replied, not realizing that he was displaying only a mock ignorance. 

"Oh, customers," he said.  "I like that word better."

"Why does the word 'user' seem to grate on you?" I asked. 

"Because I used to be one," he replied .  "And I thought I was more than just a user." 

"Do you like the word 'end user' better?" I asked. 

He paused, as if deep in thought.  "Yes, I think that's a better word for those who get the ultimate benefit from IBM products." 

"In other words," I summed it up, "you feel that the word customer connotes more of business relationship than just the mere use of the products?" 

"Something like that," he replied, hesitant to wholeheartedly endorse my summary.

The Only Consultant?

"Can now ask you a question?" I interjected, trying to get at least an even, if not the upper hand in this conversation. 

"Sure," he replied. 

"I understand that I am the only consultant with whom you're meeting.  Why?" 

Gerstner said that on the contrary, he was meeting with as many people as possible during his first 90 days in office trying to learn the industry and hear their recommendations for IBM. 

"For example, yesterday, I spent the whole day talking to industry experts" (he met with Bill Gates, according to today's WSJ story).  Then, as if catching himself, he added, "now, I don't want you to conclude from this that you are one of many consultants I have met with." 

(Later, XX said that he may have met with the McKinsey or the Booze Allen people, but had NOT met with anyone else with whom IBM Consultant Relations Department deals).

Computer "Industry Watchers"

Gerstner said that one of the things he had found fascinating was that there a whole breed of "industry watchers" at work in the computer industry which do not exist in other industries.  "You don't see that in banking, or insurance, etc." he said. 

It was now my turn to be surprised.  I said that I did not know that such people, as myself, did not exist in other industries, but that I could certainly see a parallel between my work and that of any political analysts who tried to figure out what's wrong with the U.S. government, or the world. 

"Oh, the political system is a whole different thing," Gerstner said.  "That can include everything." 

"True," I said, "but I am merely using the 'government' in the context that your new company, and other do -- as another 'industry.'  And I see a parallel between what I do and what the various political analysts do." 

He nodded pensively.

IBM Mainframe Demise

I cited this as an example of the kind of work I did with the various IBM LOBs.  He seemed totally unaware of what the February mainframe announcements were about. 

"Are you talking about the new products we announced?" he asked. 

"Well, yes... in part," I replied.  "But the new products were the item number six out of six on my list of priorities," I said.  I tried to explain to him the subtleties of mainframe repositioning from a marketing standpoint as being bigger than any feed and speeds of new models.  Somehow, I did not get the impression that he knew what I was talking about.

He did, however, try to flaunt IBM's size when he asked me how many people ANNEX had.  I said five. 

"Oh, so you're not really involved in major projects," he said. 

"No," I replied, "we are not in the hamburger consulting business.  The people I consult for are typically heads of businesses with large staffs themselves.  They typically look for quality, not quantity."  Somehow, I did not get the impression that he'd heard me on that topic, either.

Global Perspective

I then said to him that one of the things which distinguishes us from many other consultants is that we look at things on a global basis.  I pointed out the U.K., as the test bed for pricing issues; and Australia, as the test market for the Japanese computer manufacturers before entering the U.S. market. 

He seemed astounded.  "Australia?" he asked in genuine shock. 

Gerstner proceeded to argue why he thought that Australia was not at all a good test market for the U.S.  He talked about a lack of cultural identity; about the closed-mindedness of Australian companies; about government control. 

"All of this is true," I said.  "But, Australia is physically closer to Japan; it's an English-language market; and last and the most important -- it's a much smaller market than the U.S., so the cost of failure is that much less." 

He agreed with the last two points, but argued that San Francisco is closer to Tokyo than Sydney. 

"I don't know about it," I said.  "Maybe it is physically, but culturally, they are thousands of miles apart."  I said that Australians can't quite decide if they want to be Asian or Western. 

"Well, I guess, you've just proven your worth," Gerstner said pensively.  "You've told me something I did not know and would never have guessed myself." 

I then asked Lou in which one of his former jobs he has had to deal with the Australian market. 

He said "in all of them."  "I've been to Australia at least two dozen times," he added. 

And I've been to Australia only three times, I thought to myself.  And this guy is supposed to be a "quick study?"  It just goes to show you that quantity (number of trips) has little to do with quality.

Russia: World's Fourth Region

I changed the subject to Russia as another example of an oversimplified manner in which the Western companies look at the world.  I referred to my conversation with an Indian economist, who divided the world into three major economic regions -- Europe, North America, Asia/Pacific.  Yet, when I questioned him on the reasons certain countries were more successful than other, he said that one common denominator was the quality of the work force (i.e., technical education).  He pointed to France and Japan as examples. 

"That made a lot of sense to me," I said, "so I asked him how he could justify his three-region world economic model in view of the fact that the world's greatest pool of technical human resources is in Russia? 

He replied, 'you're right, but I still believe in the 'rule of three.'"  Everybody laughed.  "At least he was honest," I said.  I proceeded to assert that the world economy in the 2000+ "will be a four-legged animal, not a three-legged creature we know today." 

"Unless we blow ourselves up in the meantime," I added. 

But, Gerstner did not seem to have heard my last remark.  By this stage, he was deep in thought over what I had said before.  "But, the Russians aren't really entrepreneurial people," he said, as if speaking half to himself. 

"Be careful about that, Lou," I said.  "You're looking at 70 years of the Russian history during which the entrepreneurship was outlawed.  But, you can't outlaw the genes!" 

Of course, I was referring to the thousands of Russian (mostly Jewish) immigrants who have proven their entrepreneurship by making it big in the U.S.  It's just that they no longer use their Russian names, and are, therefore, harder to recognize.   To me, this part of the conversation revealed not just Gerstner's lack of international experience, it reconfirmed the relatively sheltered WASP-ish environment in which he grew up and matured as a business person.

I then explained to Gerstner my work with IBM's European executives on trying to open up the USSR markets well before the breakup of the Soviet empire.  I agreed with him agreed that "counter-trade" was the only way to get paid in those markets.  "I think we should deal with them on a wholesale basis," he said (implying through the middlemen [like myself] who would take the risks?).

Apple's Russia Venture

"Did you see that Apple is now entering the Russian market?" Gerstner asked, almost bewildered, looking at me and XX. 

"Yes, and that they've already raised the bar to a 20% market share," I replied. 

Gerstner said that that's another thing he'd found strange about the computer industry.  "Everybody seems to talk first, deliver later," he noted. 

"I don't know if you realize this, Lou," I said.  "But, you have a tremendous built-in advantage in Russia, even though, until recently, you did not even have a company operating there."  I then explained the reasons why the Russians clones IBM PCs and the S/370 architecture, comparing it to the way they developed their automotive industry on the basis of the German VW designs which they captured after WW II. 

Gerstner nodded in agreement.  Or was it just understanding my point?

Top Five Priorities

As the time was running out, Gerstner asked me what I thought he should do to revamp IBM. 

I asked him if he had read the stuff I had been sending to him. 

He said that he remembered something, but that he gets a lot of stuff.  "So, if you'd like to tell me what you've written I'll have some of my staff read it." 

Brushing aside his imperial attitude (reading is evidently something emperors have their lackeys do for them), I briskly went through my five recommendations (in less than five minutes). 

When I was finished, he said that he remembered reading them.  He also said that he'd received many other recommendations, albeit few of them were as succinct as mine.  He made a gesture indicating about a foot-deep report.

As we were shaking hands and saying goodbyes, I told him that I wished him luck in his job.  "I don't envy you on it," I said. 

As I was leaving the room, I also heard XX tell Gerstner the same thing: "Good luck!"  To which, and to my surprise, Gerstner replied: "And good luck to you, too!" 

Later on, XX told me that he was just as perplexed about what this wish meant. 

IBM “Kremlinologists”

No sooner was my meeting with Gerstner over, XX’s phone reportedly started ringing off the hook, this IBM handler later told me over dinner.  Most of the calls came from other senior IBM executives, now Gerstner’s sub-ordinates.  All wanted to know how the meeting went. 

Reading the Armonk tea leaves has been a part of the Big Blue culture.  XX, who had spent several years at IBM Europe headquarters in Paris, likened the process to the people trying to decipher the Soviet Union leaders’ signals in the Cold War era.  The IBM “Kremlinologists” (XX’s expression) were evidently fast at work after my first meeting with their new boss.

Here are some excerpts from my diary notes about that discussion:

The Calls…

(a dinner meeting, 18:05 to 21:30)

Even before the end of the afternoon, XX said he'd received calls from all sorts of IBM executives who wanted to know how my meeting with Gerstner went.  To most of them, he described it as being "bland" (to Jim Clippard, for example, the head of IBM Investor Relations).

One of the people who called XX was Dennie Welsh. 

"Dennie never calls me," XX said.  Yet, this time, he wanted to know if the subject of ISSC (now known as IBM Global Services - Annex Ed.) ever came up.  Dennie also said that Gerstner did not like LaBant.  XX thought was a curious thing to say about the person who was Welsh's and XX's -- BOSS! 

When XX came home after our dinner, he got a call at home from Bob LaBant [the IBM executive in charge of North America at the time - Annex Ed.], who also wanted to know how my meeting with Gerstner went.  It was about 10:30 p.m.  XX thought that this kind of anxiety only reconfirmed LaBant's shaky standing with Gerstner. 

Re. Gerstner-Personal

XX said that he'd worked for John Opel; had been on Akers' staff; and did not like many of the things that he had seen.  But he thought Lou Gerstner "could not hold up a candle to any of them, (not) even (to) Akers." 

Gerstner had apparently chewed him out even before our meeting started:

"Why did LaBant want me to see this guy?  Am I also going to have to see this S.A. character?" Gerstner was apparently asking. 

XX said he would not, and tried to explain the difference in the depth of analysis between myself and S.A.. 

Gerstner said that he was used to dealing with McKinsey or Booze, Allen people, but not these "computer industry consultants." 

To which XX replied: "With all due respect, I've been around this industry for almost 30 years; I have dealt with thousands of customers and hundreds of consultants, but I've never seen a Booze, Allen or McKinsey consultant at any of these customers." 

XX said that he and Gerstner engaged in a staring match after he'd said that.  Finally, Gerstner dropped his eyes and changed the subject. 

Gerstner: Not So Tough?

XX also told me that, before our meeting started this afternoon, Gerstner was highly critical of my analysis of IBM's latest software prices.  "He doesn't know what he is talking about," Gerstner said referring to me, prior to the start of our meeting. 

"Yet, he never brought this up during our meeting, much to my regret," I said. 

"I know," XX said.  "That's what really ticked me off.  Why was he unloading on me if he were not man enough to take you on?"  XX said that people like Welsh, for example, "who like you, are as tough as nails, aren't going to take this bullshit from Gerstner."  And if people like that start quitting, there will be no stopping the exodus from IBM.

XX said that the woman whom Gerstner has just brought in as the VP of corporate marketing was basically "a travel agent at AmEx."  "That's the job which 'Buck' Rogers, Terry Lautenbach, Mitch Watson and Pierre Hessler used to have," XX said.  Meanwhile, Kalis, Gerstner's top PR man, continuously carries a beeper around his belt, on which his boss can reach him. 

"I hope you're wrong," I said.  "I hope that Gerstner heard me when I said that he ought to hire back some of the lost talent which Akers had frittered away, not just keep downsizing IBM."  In any event, I told XX that I intended to keep my mind open.  "I can see why you're so skeptical about him," I said.  "But, I also think that he deserves a chance to tell us what he would do before being cut to pieces.  But, if after the next three to six months nothing much has changed, I'll cut into him myself," I said.

Gerstner - Summary

Overall, I got the impression that knives were out for Gerstner among the worthy insiders.  That would not be surprising if he were indeed trying to dismantle the "IBM culture."  But, if he merely keeps on doing the same things that sank the "old IBM," he'll be "killed" by the insiders before the outsiders ever get a chance!  After all, the insiders know a fake when they see one! Because they have seen so many...

One such IBM insider was Lucie Fjeldstadt, then a powerful software executive at Big Blue.  She evidently shared XX’s disdain for the new Armonk boss.  Here’s what reportedly happened when she left IBM, shortly after Gerstner had take over.

Lucie Fjeldstadt: Abrupt Exit

John Akers apparently called Gerstner and asked him to try to prevent Fjeldstadt from leaving.  So did some other former IBM executives.  When Gerstner met with Fjeldstadt, he told her that he'd received all these calls, and that he wanted to know why it was that he should follow all these peoples' advice. 

"Lucie just got up and left," XX said.  "If I had to give him my resume after 25 years with IBM, f…. him!" she said. 

XX also said that Lucie had told him that Paul Rizzo was actually running IBM, not Gerstner.

In short, there was a lot of turmoil and controversy at Armonk during Gerstner’s first two months on the job.  Of course, most of it away from Wall Street lime lights and public scrutiny at the time.

Not a Visionary

Following our first encounter, this writer continued to keep an open mind about the new IBM boss, despite some questionable decisions Gerstner made during the summer of 1993 (see Annex Bulletins “Bernard Puckett: Gerstner’s First Blunder Raises Questions…,” June 25, 1993; “Gerstner’s First Quarter…”, July 27, 1993; “Gerstner Reshuffles the Deck,” Sep 22, 1993; “Cannavino to Replace Puckett,” Nov 5, 1993). 

Perhaps the most revealing about what kind of a leader he was going to be was his declaration in July 1993 that ‘the last thing IBM needs right now is a vision statement.”  Gerstner took a lot of heat in the media over that comment.  But here was our reaction:

As 1993 drew to a close, the IBM stock was still down in the doldrums (around $18, adjusted for subsequent splits).  The media were still beating the warning drums about the IBM future.  Gerstner’s place on the honor roll of Big Blue leaders was far from assured.

In March 1994, Gerstner finally came out with his “vision statement.”  And it was a whimper.  The IBM CEO showed himself to be more of a mechanic or an engineer, than a visionary or a business architect (see “Mountain Shook, Mouse Was Born,” Mar 1994). 

At about the same time, however, we learned that Gerstner was about to adopt the last of the five recommendations this writer gave him in our first meeting in May 1993.  Indeed, by May 1994, IBM announced that it was reorganizing itself along industry lines.  The Era of Services seems to have finally arrived at Big Blue.

The Second Meeting

SCOTTSDALE, Oct 26, 1994 - No wonder our second face-to-face get-together in Scottsdale, Arizona, was like a “love in.”  Gerstner seemed to be in an expansive mood and was very complimentary about Annex Research and this writer’s work.  Here are some excerpts from our diary notes about that meeting:

Preamble

The Lou Gerstner Meeting

(at the Suite 360 of the Scottsdale Conference Resort - XX also present)

Introductory Greeting

Lou and Consultants

Mainframe Recovery

New Customer "Buying Standards"

Centralized Factory; Decentralized Service

How High Is High Enough?

Personal, Vacations, South Africa

Of course, the call never came.  All this was just “happy banter” after a friendly meeting.

Just as was the case after our first meeting in May 1993, as soon as this one was over, the “IBM Kremlinologists” went to work again.  XX said his phone started to ring off the hook again, as various senior IBM executives piped it to hear how my meeting with Gerstner went.  Here are some of my Oct 28, 1994 notes about it:

Epilogue

(XX’s telephone call from NY at about 10:30)

John Thompson

Bob LaBant

JJ

So I guess my two bottom line conclusions after my second meeting with Gerstner were:

(1) IBM still has an emperor for a leader;

(2) Even emperors can be obsequious at times.

Little did I know, however, how thin-skinned this “emperors” can be.  What I was about to find out about Lou Gerstner during a late January 1995 trip to Washington, DC, would put his character into a whole new perspective. 

The Man Who Is “Sir” to Potus

WASHINGTON, DC, Jan 26, 1995 - It was a cold and wintry night when we sat down to dinner at the “El Caribe” restaurant on Georgetown’s M Street.  My dinner companion, Peter Krogh, had been Dean of Georgetown University’s prestigious School of Foreign Service (SFS) for over 25 years.  He had just announced that he was planning to step down at the end of that school year (1994-1995). 

The main purpose of our meeting was to talk global geopolitics.  So PK had this to say about one of GU’s famous graduates, then the main occupant of the White House:

Even though PK was also hosting an influential TV show on foreign policy (in addition to his duties as Dean), he seemed to go out of his way to distance himself from the then current Potus (President of the United States).  Here’s what he said about both Clinton and Al Gore:

By now, you may be wondering why you are reading this discourse politics in a story about Gerstner?  Because it provides the relevant backdrop to what PK said next about the then IBM CEO and chairman:

Gerstner at Bilderbergers Conference

For those of you who may be wondering why I wanted to call Gerstner, rather than write to him, it was to help the IBM CEO save face.  Given how important the man whom Clinton addresses as “Sir” was in Washington and in global (“New World Order”) scheme of things, having one of Gerstner’s staff read my memo about what happened in Helsinki would have embarrassed the Big Blue boss in front of his staff.  I wanted to spare him that by talking to him personally about how he had offended PK (probably unintentionally?).  And to give Gerstner a chance to rectify the situation - also personally.

Trying to Save Face

WASHINGTON, DC, Jan 27, 1995 - So the next morning, after I had checked my bag at the Washington National Airport, I called Gerstner from an airline executive lounge. Here’s an excerpt from my diary about what transpired. 

Lou Gerstner

(attempted telephone conversations - 8:30 through 13:30)

Dennie Welsh

(telephone conversation - at about 13:40)

And that was that, I thought.  At least for that Washington episode.  But it was not to be…

Gerstner’s “Loss Review”

NEW YORK, Feb 6, 1995 - A few days after returning home from Washington, I got a letter from PK (the GU SFS Dean) who said in part:

“I was contacted by someone from IBM.  I thank you for your follow-up.  Unfortunately - when I got no response from Gerstner - I proceeded to equip myself with an NEC Versa” (a Japanese laptop).

(see Welsh letter/chart, Feb 6, 1995).

During my next trip to New York, I broached the subject with Dennie Welsh, the IBM executive who evidently was the only one to have really done something about trying to protect his boss’s reputation.  Here’s an excerpt from my diary notes about that Feb 6, 1995 conversation:

Re. Gerstner/PK

Furthermore, notice how Welsh skillfully shifted the blame from his boss’s arrogance and klutziness in two particular cases (PK and yours truly) to a general positive? (spending time with customers, even to excess).  In other words, even when being chewed out unjustly, the IBM guard dogs keep protecting the master. 

But I was in a far less benevolent mood toward Gerstner.  I thought the IBM boss acted as a pompous jerk by treating Welsh so shabbily.  Blaming subordinates for one’s own shortcomings is hardly my idea of a successful leader.  Especially when the subordinate went to bat for you.

So after coming to my New York hotel room after my Feb 6, 1995 meetings, I fired off a fax to Welsh with a copy to Gerstner.  I no longer cared how many of Gerstner’s staff may get to see from it what kind of an arrogant SOB they were working for.  Come to think of it, alas… they probably already knew it all too well.

I finished my fax/letter by asking Welsh rhetorically:

“Who does Lou Gerstner’s ‘loss reviews’?  You have my permission to share this note with them” (the Board - see the chart).

“Loss reviews,” by the way, were an IBM salesman’s worst nightmare, back in the good old IBM days.  They were conducted every time a salesman lost a major deal.  The poor salesman would be hauled off to explain that to top IBM executives who sat during the loss review like an Inquisition Court.  The purpose was to learn why the contract was lost, so as not to repeat the same mistake again. 

During my years at IBM (early and mid 1970s), this writer was lucky enough never to have had to be the subject of a loss review.  But some who went through the process had told me they would rather have faced Mohammed Ali in a ring. J

But those were the good old IBM days.  Back in Armonk of 1995, the object was not to question and learn; it was to shoot the messengers and cover up bad news.  So that no one could see the emperor had no clothes.

Ten days later I was back in New York.  In the meantime, Bob LaBant, once considered a candidate to replace John Akers as CEO, had resigned.  We met for breakfast at a Westchester County hotel.

“Aren’t you glad you’re out?” I joked. “If you weren’t you would have probably gotten an earful from Gerstner, instead of the poor Dennie Welsh.” 

LaBant laughed.  He said that large companies do things in weird ways. When he was the Executive Assistant to John Opel, and later to John Akers, LaBant said that his main objective was to get things done without being noticed. 

“If I succeeded in doing my job right, nobody should have known my name,” he said.  “The fact that you now know who LB is, is already a mark against her.”

Epilogue

LaBant was right.  Gerstner was furious, especially after my Feb 6, 1995 faxed note.  But I did not find out about it until about a month or so later.  I recall being at a professional tennis tournament in Scottsdale when my cell phone rang.  It was Dennie Welsh.

“LB’s gone,” he said.

“Gone?  You mean fired?”

“Not quite, but almost.  She’s been reassigned.”

“Away from Gerstner’s office?”

“Yes.”

It was the end of Gerstner’s Obsequiousness phase and the start of his Incivility period. 

Later the same month (March 1995), the New York Times ran an article about IBM and Gerstner’s executive compensation (“A Good Year for Big Blue and Its Leaders,” Mar. 14, 1995).  The Times reported that the IBM CEO had earned $4.6 million in salary in bonus, plus $4.9 million in stock options, and another $7.7 million related to stock options in his former job at RJR Nabisco.

The Time quoted this writer as follows:

Gerstner exploded again, as I found out later.  In late April, he had Ned Lautenbach, then the head of all IBM global sales and marketing operations, dispatch a personal messenger to me in Phoenix.  It was my old handler XX, who had attended our first two meetings.  And the message was that the Emperor was not amused.

“Your consulting contracts with IBM will be slashed,” XX said.

They were… by over 50% in that year alone (1995), despite protests by some of the satisfied IBM clients.

Things went from bad to worse after that.  Even though many top IBM executives thought it was a good idea to break up IBM, as suggested by yours truly in the first quarter of 1996 (see “Break Up IBM!”, Mar 20, 1996), they all fell silent after the Emperor nixed it, calling it a “dumb idea” (see “Louis XIX of Armonk,” Aug 24, 1996).

Gerstner popped his tonsils after reading this article and seeing the Louis XIX cartoon, we were told afterward. For, he had other ideas in mind for self-enrichment. Instead of breaking up the slumbering giant so as to make it more nimble and to force Wall Street’s higher market valuation (which was our logic behind the break-up idea), Gerstner opted for a “bribe and greed” method.  He bought Wall Street’s recommendations through tens of billions of dollars of stock buybacks.  At the same time, he and other top IBM officers cashed in by insider stock sales (see “Sir Lou OutLayed Lay,” Feb 2002).

By the end of 1996, Gerstner had reportedly given a direct order that all Annex Research contracts with IBM be canceled or not renewed.  Many of our IBM clients were furious. But they were powerless to stop the Emperor from acting imperiously. “Sorry,” was the word we kept hearing over and over again.

And then there was the final lie…

The Final Betrayal

On New Year’s Eve 1996, XX and yours truly exchanged “happy new year” greetings over the phone.  During the course of the conversation, XX shared with me some of the information that a recent McKinsey report had concluded about IBM.  Which is basically your have been saying all along, XX said. 

XX added that IBM had paid $21 million for the report.

I asked XX if it would be okay for me to use that information in an Annex Bulletin, without attribution to him, of course. 

XX replied he would have no problems with it.  So I wrote the Annex “S/390 Is Still King,” (see APPENDIX A - Annex Bulletin 96-56, Dec 31, 1996).  I also shared a heads-up about it with reporters from the New York Times and CNN.  They were both very interested and jumped at the story idea.  You can follow what next from my diary notes:

Jan. 3, 1997 (at about 8:30 a.m.)

Re. STEVE YOUNG/CNN

---

Jan. 3, 1997 (about 8:40 a.m.)

Re. XX

I lied.  I may have felt that way at the moment, but I discovered later, after the message had sunk in, that I was deeply hurt.  I felt betrayed.  XX and I never spoke again.  I did think we were friends after all we had been through with King Louis.  On Jan 3, 1997 I found out otherwise.

So it goes… (as Kurt Vonnegut kept repeating in his masterpiece book “Slaughterhouse Five” every time someone died).

“Et tu, Brutus?” also came to mind.

In June 2000, we published for the first time some excerpts from that 1996 Bulletin within our five-year forecast for IBM (“Stagnant Revenues, Declining Earnings,” June 2000).

An Unpublished Bulletin

At the end of 1996, the IBM shares traded at about $38 (adjusted for subsequent splits).  As of the time of our June 2000 forecast, the IBM stock was hovering in the $110 to $120 range.  In August 2000, it reached $135, a high in recent years.  IBM shares are currently trading at about $77, after dropping to a low of $54 in September.

Lou Gerstner is now history.  So it goes… What remains is his legacy - the Era of Greed.  And a $131 billion (market cap) slumbering giant could have been much bigger and nimbler.  And now, “The Untold Story” is also a part of the Gerstner legacy.

This essay isn’t a book, as some of our clients and friends have urged us to write.  But it can serve as a juxtaposition-chapter of “Louis XIX” book about himself.  So that the whole truth may be known about the man who would be king.

Happy New Year!

Bob Djurdjevic

For additional Annex Research reports, check out... 

2002: “Gerstner: The Untold Story”  (Dec 27), "Gerstner Spills the Beans" (Dec 13), "On a Wing and a Prayer" (Oct 21), "IBM-PwC Tie the Knot" (Oct 2), "IBM to Take $500M Charge" (Sep 3), "IBM Layoffs Confirmed" (Aug 14),  "Half or Double Trouble?" (Aug 12), Wall Street/Main Street Chasm (June 25), “Wall Street Casino,” (June 21), Big Blue Salami (June 19),  Sam's Dull Scalpel (June 4), Looming IBM Write-offs (May 23), "No New News at IBM" (May 15),  "Looming IBM Layoffs" (May 14),  "Sam Is No 'Change Agent'," (May 6), Additional Stock Buybacks Authorized (Apr. 30, 2002),  "IBM 5-Yr Forecast: From Here to Eternity?" (Apr 2002),  “Tough Times, Soft Deals,” (Apr 25, 2002), "A Disastrous Quarter," (Apr. 17),  Industry Stratification Trend (Mar. 30, 1990),  “Gerstner’s Legacy: Good Manager, Poor Entrepreneur” (Jan 2002), IBM Pension Plan Vapors: Where Did $17 Billion Go? (Mar 2002), "Big Blue Starting to Unravel," (Apr. 8, 2002), SEC Launches Formal Probe of Wall Street Research (Apr 25, 2002),  “SEC to Tighten Stock Option Rules” (Apr 5, 2002), "Sir Lou OutLayed Lay!" (Apr 1, 2002), "IBM Pension Fund Vapors," (Mar 23, 2002),

A selection from prior years: Is IBM Cheating on Taxes, Annex Bulletin 99-17 (May 1999),  IBM 5-year Forecast 2001: An Unenviable Legacy (June 2001),  "Break Up IBM!" (Mar. 1996), Fortune on IBM (June 15, 2000), “Smoke and Mirrors Galore,” July 2000), "Slam Dunk of Bunk" (Jan 2000), Annex Bulletin 98-14 ("Wag the Big Blue Dog"), Armonk's Fudge Factory (Apr. 9, 1999),  Where Armonk Meets Wall Street, Greed Breeds Incest (November 1998),  Stock Buybacks Questioned: Is IBM Mortgaging Its Future Again?, 97-18 (4/29/97),  "Some Insiders Cashed In On IBM Stock's Rise, Buybacks" 97-22, 7/27/97,  Djurdjevic’s Forbes column, "Is Big Blue Back?," 6/10/97;  “Executive Suite: How Sweet!,” (July 1997), "Gerstner: Best Years Are Behind", Aug. 10, 1999), "IBM's Best Years Are 3-4 Decades Behind Us" (July 1999), "Lou's Lair vs. Bill's Loft" (June 1999),  "Corporate Cabbage Patch Dolls," 98-39, 10/31/98; Djurdjevic’s Chronicles magazine October 1998 column, "Wall Street Boom; Main Street Doom", “Louis XIX of Armonk,” (Aug. 1996), "Mountain Shook, Mouse Was Born" (Mar. 25, 1994), “A Nice Guy Who Lost His Compass” (Jan 26, 1993), “Akers: The Last Emperor?” (June 1991) etc.]

Or just click on and use appropriate  keywords.