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From Annex Research' Exclusive Never-Before-Published Diary Notes…

Gerstner: The Untold Story

How IBM Chairman Flunked “Globalism 101” in 1993, “Civility 201” in 1995/1996, While Passing “Obsequiousness 301” in 1994

PHOENIX, Dec 27 - When word got out last spring that the former IBM chairman and CEO, Lou Gerstner, was writing a book about his years at IBM, some of our clients and friends urged this writer to do a biographical juxtaposition.  Since we are not in the book-writing business, we passed on the idea.  Instead, by way of closure of the Gerstner era at IBM, we are bringing you this exclusive 11,500-word year-end essay.  Think of it as a chapter of an unwritten book about the Era of Greed, if you will.

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:

“We agree.  But with emphasis on ‘right now’ in the above statement.  After all, Gerstner has only been in the job for less than four months… But if Gerstner still expects us to buy his line about IBM not needing a ‘vision statement’ by about the year and 1993, he’ll be in for a rude surprise.”

(Annex Bulletin 93-40, 7/27/93)

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:


The Scottsdale Conference Resort was swarming with security.  There was a guard in front of Gerstner's door at all times, for example. 

"How do you like being married to a celebrity," XX (the IBM handler) asked my wife over dinner the night before (Oct 25).  "There are 400 people from here from Armonk whose job is to ensure that Bob's meeting with Gerstner went off without a glitch.  Has any of that gone to his (mine) head?" he said. 

We all laughed at such pomposity.

Yet, no one asked me to show an ID when I drove into the Conference Center.  Nor when I walked into the resort building.  Although XX had a name badge made up for me, he never gave it to me.  So I never used it.  And no one questioned my presence wherever I went - without a badge!  So much for the quality of the IBM security!

There were also red-shirted men and women lining the corridors of the building in which the private meetings were taking place - about every 10-15 yards apart.  They were supposed to help the people find their way to the rooms in which the meetings were held.  The "IBM cardinals" helped me with my first meeting at 7 a.m.  I still saw them there - every 10-15 yards apart - at about 5 p.m., when I took a walk around the entire facility (without a name badge, of course). 

I said to XX that, in my estimate, there were at least twice as many IBMers there, as there were customers.

The Suite 160, which was allocated to me for the entire day (!), was a large corner suite.  As it turned out, it was right below the Suite 260, one floor above, which was the home base of Bob LaBant, the head of IBM North America, the IBM conference host.  As it turned out, Lou Gerstner had booked the Suite 360 for the same purpose.  You guessed it.  It was on the top (third) floor, above LaBant's suite. 

I am noting all these details just in case anyone may like to know to what extent the IBM "rites and protocols" people plan an event like this.  The big boss at the top; then the smaller boss; then the "guest of honor..." (I was the only outsider allowed at this closed gathering, I was told). 

"I've never spent more time in my entire life on a 15-minute meeting," XX admitted.  XX was an IBM director-level executive, who flew from New York to Phoenix for the sole purpose of acting as my aide in all these meetings. 

I was wrong when I predicted in June 1991 that Akers would be the "Last (IBM) Emperor."

The Lou Gerstner Meeting

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

Introductory Greeting

Gerstner greeted me very warmly and immediately commented about  my "southwestern tie."  I told him the tie actually came from Florence, Italy, but I agreed with him that it looked "southwestern" (it was the same tie that's shown in my pictures with Gen. Mladic in Bosnia).  Gerstner said that he regretted missing "all this great weather outside," as he will be cooped up in meeting inside the hotel all day.  He sounded envious of my (southwestern) lifestyle.  I tried to console him by saying that this time of the year was actually "my favorite" where he lived (in CT).  He agreed.

Lou and Consultants

I reminded Gerstner of our first meeting (in May 1993), and asked him what his view was today of the consultants' "sub-industry" which he had noticed in May 1993 as surrounding, or being imbedded in, the I.T. industry.  He said that his view back then was mostly "horizontal."  Over time, he got to appreciate the fact that, "there are consultants, and there are consultants." 

He talked of the people who made their living by dealing in "gossip."  He also mentioned consultants who sold their general "wisdom" from other industries without really understanding what they were talking about.  And others, who are narrowly specialized in their fields (i.e., technical, or PC, or storage...). 

"And then, there is very small number of people who are truly knowledgeable about the industry, and very insightful, like yourself," he said.  "You have a really good FEEL for the industry.  Perhaps that's because you used to be within the industry?" he speculated.  The bottom line, he said, was that he has learned to discriminate between the various people who were trying to offer him advice. 

Gerstner also said that the IT world is very complex, and the product cycle very short, so that the margin of error is much smaller than in other industries.  "That's why we need an outside knowledgeable third-party opinions, such as yours, so as to validate our own rationale," he said. 

Mainframe Recovery

Gerstner brought up the subject of mainframes as an example of the kind of good insight which, he thought, I was on the mark.  "When I was a customer, I just could not envisage running some operations without a centralized mainframe," he said. 

"Yet, when I took over this job, a majority of people in this industry were saying the 'mainframe is dead.'"  He added that just today, pointing at the conference table behind the couch on which we were sitting, one of the largest customers in the world has told me that we (IBM) can't build a mainframe which is big enough for what he really wanted to do. 

"When are you going to have a machines which will have this many MIPS, and that many terabytes of storage?" the customer was pressing Gerstner. 

He said that "the pendulum (of mainframe demand) is now swinging back toward the center" (after having gone to the extreme of declaring the mainframe dead).

I said to Lou of my conversation with Nick Donofrio in January 1993 - while Akers was still around - in which I told Nick that he "really needed a few good-sized disasters" (which would scare people away from the exodus toward "client/server" solutions).  "Now I am not suggesting that you go and sabotage the PC installations.  I am merely saying that you need to be patient," I said.

"You were very prescient," Gerstner said.  "That's exactly what IBM had to do."

New Customer "Buying Standards"

Gerstner then went on to talk about how the IT industry is in its relative infancy; still lacking many standards as compared to mature industries. 

I agreed, but added that I assumed that, by "the industry," he meant the standards which the vendors need to make the equipment.  "But, there are also the buying standards which need to be developed," I said. 

Gerstner nodded, and went on to give me more examples of the former.  Then he paused.  Suddenly, a light seemed to go off in Gerstner's head. 

"Now, what you've just said about the 'buying' standards," he said, squinting as if trying to soak in the information through his eye pupils.  "Would you please amplify on that?" 

I did.  I explained that I was talking of establishing the buyer's expectation standards.  Speaking as a customer, for a moment, of both IBM and Windows, I said that I was appalled by the poor quality of the software which has become the bestseller in the industry. 

"I could not believe it," I said.  "Windows is up and down like a toilet seat.  If I were a car buyer, for example, in other words one of the established industries of which you've just spoken, I'd be screaming bloody murder.  That would be like having my car in a shop every other day.  Which American car buyer would ever put up with that?" 

So, I concluded, that whichever IT vendor first figures out how to help the customers buy on quality, will probably make a lot of money for itself. 

Gerstner seemed fascinated with the idea.  He just sat there on the couch for a few seconds without saying a word.  One could practically hear the wheels turning in his brain. 

"That's very interesting," he finally said.

Centralized Factory; Decentralized Service

I asked him if he also remembered another thing we talked about in our last meeting - about the break up of services and the centralizing of the factories.  He nodded affirmatively.  I told him that I was very pleased to see him follow through with such strategies.

"Look," he said, straightening up on the couch.  He lobbed a napkin which he had squished into a ball aiming for a cup on the table in front of us.  (He missed).  "You and I agree in everything, except perhaps, on the issue of (mainframe) software pricing." 

I smiled and interjected that, "it seems to me that we still disagree on that point."

It was his turn to smile now.  "I felt we should give a signal to our customers that we intend to keep the mainframe platform competitive with any other offerings in the industry," he explained his rationale.  "You felt we should not discount software; that we should send such a message by only working on the hardware pricing.  That's a valid point.  Because in the end, both tactics lead to the same goal."

How High Is High Enough?

At this stage, his EA, who had walked into the room a while back, was getting quite antsy.  "I guess, that means that I have to go on," Gerstner muttered.  He apologized about the brevity of our meeting (even though by this stage, it had gone on for more than double the planned amount of time).

I said that I wanted to ask him one more question.  I complimented him on trying to tone down the euphoria over the good third quarter results.  "But I'd like to know what are is your targeted performance?  When will you be happy?"

"Never," he replied without hesitation.

"Okay then, let's say, when will you be 'almost happy?"

"Look, Bob," Gerstner said, leaning toward me, "I don't ever want to have specific targets.  I want our people to keep stretching.  What may be a reasonable goal for one part of our company, may be just coasting elsewhere.  I don't want our Chinese guy to be satisfied with the $1 billion revenue target, for example.  On the other hand, that could be a very good goal somewhere else."

Gerstner went on to explain that he admired greatly Jack Welsh, the GE chairman.  "Jack took over a company about the size of IBM (although he was an insider with 20 years' of experience, unlike Gerstner, who came in as an outsider to IBM).  Of course, everybody knows that Jack kept the earnings growing at 12% per year, or whatever the number was... But his greatest feat in my mind was that he has managed to keep the GE hungry through all these years!  I'd be 'almost happy' if I could achieve that at IBM."

Personal, Vacations, South Africa

On the way out, Gerstner thanked me for offering to meet with him occasionally at Armonk.  But, he said that he'd been traveling a lot.  At one stage this year, there was a period of five weeks during which he had not been at Armonk at all, he said.  He added, "and, therefore, not with my wife and children, either."  Eventually, he managed a vacation with his wife in South Africa, he said.

"South Africa?" I exclaimed.  "My family been working on me for years to go there."

"You should.  We really had a great time," Gerstner suggested.

"I know.  But, I told my family we'd go when somebody invites me to speak at a function there."

"Always a consultant first!" Gerstner said, roaring with laughter.  Turning to his aide, he said, "maybe we should tell our people in South Africa to start working on that speaking engagement."

This time it was my turn to laugh.  I thanked him for the suggestion, and said that I'd be waiting for that call from 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:


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

John Thompson

XX said that John Thompson (JT) approached him during the IBM evening reception in Scottsdale to hear what XX's impressions were from my meeting with Gerstner.  XX told him.  JT said that he had also spoken with Gerstner after the meeting, and that Gerstner had said some very flattering things about me.  Gerstner said that he was especially impressed with my grasp of the international business issues.

JT continued to give XX his 'two cents' worth" of comments about me.  JT said that, "perhaps Bob doesn't always understand the IBM politics.  And perhaps we don't always understand Bob's politics.  But he sure has a lot of good ideas.  Sometimes we, at IBM, tend to become too insular.  We need outside opinions like Bob's to make sure we stay on the straight and narrow."

Bob LaBant

XX said that LaBant was ecstatic about the results of the Gerstner meeting.  "Lou was in an expansive mood after his meeting with Bob," LaBant said.  LaBant wanted to know how long the meeting was.  "34 minutes exactly," XX said.

(I never knew that they were timing even things like that!)


JJ, XX's boss, was the person who walked in, broke up my meeting with Gerstner, and took him to he had another one.  JJ and Gerstner don't really know each other, XX said, so it was unlikely that Gerstner would confide in JJ with any substantial comments.  Nevertheless, XX probed JJ afterward to see if Gerstner had said anything to him about the meeting.  JJ said that Gerstner's comment was, "Bob is a very smart guy." 

JJ also said that Gerstner was in a great mood after the meeting.

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:

PK said that he became the Dean of SFS two years after Bill Clinton had graduated from it.  The GU campus and the SFS were a real mess, he said.  He recalled the first graduation speech he had heard by a black woman, who was the Valedictorian of that year’s class. She accused the faculty members of being criminals and murderers (this was in reference to racial tensions and the Vietnam war). 

“So she was one of the ‘flower children’?” I asked. 

“She was,” PK affirmed.  Sounding apologetic, he added that she exemplified the type of students at the SFS in Bill Clinton’s time on the campus.

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:

PK sounded very angry with Clinton, and thought even less of Al Gore.  “The only thing Gore is capable of doing is reading the monosyllabic words from a TelePrompTer,” PK said. 

As for Clinton’s recent visit to the campus, he said Clinton wanted to make a “town hall”-type discussion.  “But instead of listening, he spent the whole time talking to the students about what his ideas were,” PK said.  “It was disgraceful.” 

And as PK was saying goodbye to Clinton shaking hands in front of his limousine, Clinton apparently got quite emotional and said to him and the other faculty members around him “I love you all!”

PK looked positively disgusted as he said that.

“This country does not need an activist President, like Clinton,” PK mused.  “He is overexposing himself, and meddling into too many issues personally.” 

Then he paused.  “You know what this country needs?” he asked rhetorically.  “This country needs a monarch!  A head of state who is seen but not heard.” 

I laughed.  “Now you’re sounding just like someone else I know who is a monarchy fan,” I said.

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

When PK learned that I know Gerstner, and have worked on and with IBM for years, he told me about an unpleasant experience he had had with Gerstner.  The two were among the participants of a high-level conference (it sounded something like Bilderbergers) which was held in Helsinki last year.  At one stage, PK complained to Gerstner that he was having trouble getting an IBM ThinkPad, and was wondering if Gerstner could help. 

“I was quite prepared to pay $2,500 or $3,000 - whatever the price was,” PK said.  PK even gave Gerstner a note as a reminder.

“And what happened?” I asked.

“Nothing happened.  Silence,” PK replied.  He added that he’d half expected that Gerstner would send him one day a complimentary ThinkPad, but instead, he has not heard a word from IBM at all.

I did not know what to say.  Nor why PK had told me that story.  So I asked him if he would mind me trying to do something about it. 

He said he would not.  So, I made a mental note to call Gerstner tomorrow morning.

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)

I first called Gerstner from the DC airport at about 8:30.  His Armonk staff told me that he was expected in the City today, and transferred me to that office.  But he had not yet arrived in Manhattan.  I explained that I was calling from an airport, and said that I’d call again at about 9:00 (EST).

I did.  Gerstner had still not arrived.  So I said that I’d call again from Dallas - roughly at lunch time (EST).

When I first called from Dallas at about 13:00 (EST), Gerstner “was having lunch with a customer.”  So the secretary and I agreed that the best time for me to call next would be around 13:30.

When I called at 13:30, the secretary asked me to hold as Gerstner’s executive assistant wanted to talk to me.

A female voice started to speak, slurring her name very quickly, and proceeded to grill me about the reason for my call. 

I first asked her to repeat her name slowly, and explain who she was.  She did.  It was LB.

I then said that this was a personal call, and that I needed to talk to Gerstner himself. 

“But he won’t be available for the next two weeks,” LB said. 

I don’t know if LB realized how insulting this was.  Only a few minutes ago, I was told that Gerstner was having lunch with a customer.  Now he is suddenly unavailable for the next two weeks?!

“Is he going on a vacation?” I asked.

“No, he’ll just be very busy,” she said.  “Is there a message I can give him?”

This time, there was no doubt in my mind that she was being deliberately arrogant, insisting on screening out my call, and trying to brush me off.

At first, I said there was no message.  “That’s what you get for trying to be nice and diplomatic with a jerk like Gerstner,” I thought to myself angrily.  “So let him stew in the mess he has made.”

Then I changed my mind.  “On a second thought, I do have a message.  I want you to give the following message to your boss.  You can tell him that my call was personal in nature.  I was trying to help him protect his reputation with an important player in Washington; someone whom the President of the United States addresses as ‘Sir’.  But that’s his problem now.”

“Please repeat the message back to me, I demanded.  This time, I was being deliberately arrogant back to LB. 

She did.  I said goodbye and hung up. 

Dennie Welsh

(telephone conversation - at about 13:40)

Welsh’s secretary had to run to fetch him from the elevator, as Welsh was leaving the office to give a speech at some Wall St conference.  I got right to the point and explained all of the above to Welsh.  I repeated that I did not care about Gerstner’s personal reputation anymore, and said that he has now managed to insult two people, not just Dean Krogh.  But I did care about the reputation of my client - IBM Corp., not Gerstner - and that’s why I called him.

Welsh took all the information down and said that he would take care of it.  Unlike his arrogant boss, Welsh sounded very grateful for what I was trying to do.

Later on the same day, after I had returned home to Phoenix, I also talked to XX about this incident.  He said that LB had already called him and harassed him about the reasons for my call - about which, of course, he knew nothing at all.  He added that LB was a person Gerstner had brought in from outside of IBM, whom he considers ‘very dangerous’ (meaning LB likes playing office power politics).

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

I then asked Welsh if he ever found out what happened in the Gerstner-PK situation.  “Yes,” he said, “you got my boss mad at me.” 

“Mad at you?” I exclaimed.  “That’s preposterous!  Weren’t you the one trying to help him?”  I added that it would not surprise me if Gerstner were mad at me, “but mad at you?  That’s ridiculous!”

Welsh said that my letter to Gerstner had caused some fireworks between Gerstner, Welsh and LB (Gerstner’s assistant who grilled me on the phone).  “For about an hour or so, the Armonk phone calls were coming in fast and furiously.  I even met personally with Gerstner over the matter.”

So why was Gerstner mad at Welsh, I wondered. 

It turned out, he really wasn’t.  Gerstner was mad at LB, though, whom he chewed out for not having handled the situation better.  In Welsh’s opinion, Gerstner was simply embarrassed. 

“He is very frustrated,” Welsh said.  “He did absolutely the right thing when he stressed the importance of customers, and made a point of visiting so many personally around the world.  He demonstrated the excellent management consultant skills which he practiced when he was 35 at McKinsey.  But, he underestimated the vastness of IBM.” So when these customers liked what they heard in the first meeting, and wanted to get more of it, Gerstner ran out of time. 

“That’s like giving someone a candy,” Welsh told Gerstner, “and when they come back for more, telling them, ‘I’m out!’ 

“It gets even worse,” Welsh continued “if the people around you, like LB, don’t have any bedside manners.” 

I grinned and noted that the politicians I meet on Capitol Hill face a similar problems - a mountain of mail and the constituents who expect to be recognized by their first name.   And that, perhaps either upgrading the quality of the staff around Gerstner, and/or the “system” of getting back to the people who communicate with him, may be the answer to the problem. 

The thought seemed to intrigue Welsh.  He nodded pensively as he listened to me.

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.”


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?”


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:

“The turnaround last year was modest,” said Bob Djurdjevic, president of Annex Research, a Phoenix computer research and consulting firm.  “I think Gerstner has done some very good things, but I’m not sure that the chairman’s compensation should run that far ahead of the company.”

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.)


Steve Young called back again after talking to IBM (he had called already at home at about 6:40 a.m. this morning about the draft of our report).  He said that IBM had flatly denied the existence of the McKinsey report, and attributed my comments to “sour grapes” because of cancellation of some of our contracts.  They also denied that all consulting agreements were being canceled, and said only ours were being cut back.

IBM spokespeople checked with the very senior executives before calling Young back.  They also told him that they had received an inquiry from the NYT last night about the same thing.  They said that the $21 million figure was not exactly accurate, which Steve interpreted to mean that it could have been $20 million or $22 million.  And IBM told Steve that they McKinsey is doing no consulting work for them.

Steve said that he was very interested in pursuing the story if we can get “proof positive” about the report.

I replied that I’d think about how I could do it without jeopardizing peoples’ careers.

Steve then told me about a story which he had dug up at RJR Nabisco about some experimental cigarettes.  But because so few people knew about it, his sources could be easily traced back to.  So he held off on the story for two years.  And when he eventually ran it, it became front page news.  But by that stage, the careers of his sources “were protected,” he said.


10:05 a.m.

Steve Young called me back again, and I explained to him, on an off the record basis, what had transpired since our last conversation - how my source at first agreed to give me the pages, and then backed out.

“I continue to be interested in this story, if you can prove the existence of the report,” he said.

Then Steve asked me if IBM has canceled our contracts.  I said they have canceled some, but that I didn’t know how pervasive this policy was going to be.  But I stressed that I was told by SEVERAL IBM executives that ALL consulting contracts were being canceled on orders from the Corporate Communications Office, not just ours.

“I’ve dealt with Dave Kalis before,” Steve said, “and I know what you and these IBM people are up against.”

“I figured as much (that you’ve dealt with him),” I said, “when I heard your RJR story.”  I added that it looks to me as if we have the start of an “IBM-gate” story here.

Steve agreed and said that it would be a big story, especially now after the IBM denial.  He said he wasn’t asking for my sources; that he was prepared to go to jail to protect his sources, so he sympathized with my position, but that he wanted me to know that if any of these IBM sources wanted to talk to him, they could count on his absolute confidentiality.

I replied that I sensed that from the beginning, that both of us had similar attitudes toward the protection of the sources, which is why I felt comfortable talking to him about it.

I said I’d have to think carefully how to proceed, and see if I can get the proof without jeopardizing the careers of the people involved.


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

Re. XX

I called HIT and told him that IBM had denied the existence of the McKinsey report, and asked him if he could send to me the seven pages of the McKinsey report (which he had in his possession). 

He said, “sure, but I’ll have to do it on Monday, because I am off work until then.”  He added then, “I swear to you that the report exists.  You trust my word, don’t you?”

I replied that I did trust him, of course, which is why I went ahead with this story, but that I needed the pages now as “proof positive,” in light of the unexpected IBM denial.

“I understand,” he said.  “I’ll FAX them to you first thing on Monday.”


At about 8:55

XX called me again, about 15 minutes after our above conversation (see msg. to WZ which I was writing when XX’s call came in). 

“I can’t do it,” he said.  “I only have two years left at IBM before retirement, and I am afraid they’ll be able to trace this back to me, as there are so few people who have seen the report.”

I said, I understood, although I pointed out to him that he has now left me out on a limb, after I had questioned him at least three times about the validity of the information, before disclosing it to anyone.


At about 9:30

I called him again and left a msg. for him (he was out getting a newspaper, his wife said).

XX called me back within five minutes.  I said that I did not want to tell him what to do, but that now that the cat is out of the bag, and IBM knows that I know about the report and some people in the media, chances are very good that he would be questioned about it anyway.  “So you have a choice - you can help me bring down the bastards who lie and cheat and who have slighted you personally, or you can let them continue to lie and cheat.”

“Bob, we’ve been friends for a long time, and I have to tell you - I don’t want to do it,” he replied.  “This is a registered confidential document.  There are very few people who have had access to it.  IBM now has a new chief of security who is a former IBM guy.  At least now if they question me I can deny that I gave you any confidential information with a straight face.”

“Who else has had access to the report?”, I asked.

“Nick Donofrio, Linda Sanford, Bruce Harreld, Bill Etherington, Hermann Lamberti, Charles... (I didn’t get the last name),” he said.  “These are all the people who are on the task force whose job is to implement the reports recommendation to grow the S/390 business.”

“And where did the figure of $21 million come from?” I asked.

XX said that that was the figure that was banded about by the people who were on that S/390 task force with him.

“Are we still friends?” he asked, sounding as if he were pleading.

“We are still friends,” I replied.

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

Over three years ago, on Dec. 31, 1996 to be exact, we wrote an Annex Bulletin that was never published (see APPENDIX A).  “Spiked” is the term media editors would use.

The reason?  A source inside IBM double-crossed us.  First, this source kept spilling the beans about a supposedly secret, $21 million-study that McKinsey & Co. did for IBM.  As it turned out, this Gerstner’s former consulting “alma mater” had evidently come to similar conclusions as we had done much earlier - that IBM was still way too dependant on “big iron.”  Except that McKinsey did it with access to insider data, while we concluded that based on publicly available information.

Then just as we were about to publish the story, our source chickened out, fearing persecution by IBM senior management whose spokesperson had denied the existence of such a report when questioned about it.

In other words, Armonk lied.

Nevertheless, we killed the story (to protect our source).  Guess “banana empires” can be as dangerous as banana republics?

Well, over three years later, we think that it may be instructive to look back at that Annex Bulletin and compare it with what we know today about IBM’s position in the marketplace.  So we bring it to you as Appendix A to this five-year forecast for IBM.

As you will see, Gerstner & Co. had sufficient outside warnings that the Big Blue was in a bad strategic shape.  Yet with exception of pushing the services, a trend that we had both recommended (as far back as 1991), supported, and that had been in effect since about 1989 (in other words, services growth had nothing to do with any “vision” Gerstner and his cronies had produced), Armonk did very little to diversify away from both, the “big iron,” and the big customers that buy it.

Sooner or later, most people, even on Wall Street, will realize that it is no longer possible to correct such strategic mistakes by painting the “Big Blue” bananas yellow.

(see Annex Bulletin 2000-15, June 1, 2000)

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.]

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Volume XVIII, No. 2002-24
December 27, 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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