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A SPECIAL ANNEX NEWSFLASH

Will IBM Announce the Bad News Tomorrow? 

Looming IBM Layoffs

Also, IBM CEO vs. CFO: A "Yin" and "Yang" Story

PHOENIX, May 14 - How many people will IBM lay off?  When? Where?  

Those are the questions we have been having to answer over and over again, ever since we revealed a week ago that the IBM CEO warned his employees on Apr. 24 about upcoming cuts (see "Sam Is No 'Change Agent'," May 6).  

The numbers floated in the media by various Big Blue soothsaying tooth fairies have ranged from a low of 8,000 jobs (2.5% of total IBM employment), to a high of 36,000 (11%).  The truth is... nobody knows for sure.  Not even Sam Palmisano.

Well, maybe Sam knows it by now.  For, we expect IBM to reveal the actual numbers just before or at tomorrow's (Wed., May 15) analyst conference. But nobody could responsibly have "known it" last week, while deliberations were still going on at Armonk and elsewhere in the Big Blue land.

And what do we expect IBM to announce?

Well, if IBM has indeed misjudged the demand by at least 10 points, which is what its CEO implied on Apr. 24, then the cuts should be quite severe... perhaps in the 10% to 15% range (i.e., 32,000+ jobs).

Here in the U.S., where most of the job cuts will be made, the IBM rumor mill is abuzz with stories about a possible closure of Endicott, IBM's original homestead, and of steep downsizing of Burlington (VT), and some other upstate New York IBM plants.  

Ditto, of course, at the Rochester, MN, facility, the home of the AS/400 and the RS/6000 midrange servers (now known as iSeries and pSeries).  And even the employees at the IBM Raleigh, NC, Research Triangle location are nervously twitching in anticipation of the Armonk announcement.

No surprise there.  We predicted as far back as March 1990 that there is no long-term future in hardware businesses (see the Industry Stratification Trend, Mar. 30, 1990).  And we said six years ago that the Big Blue should be broken up and get rid of some of its hardware businesses (see "Break Up IBM!", Mar. 1996). So it was just a matter of time before Armonk realized it, too... 12 and six years later,  respectively.

But even the IBM Global Services won't be spared, according to some IBM sources.  Which would be ironic given that this erstwhile IBM "crown jewel" had just added in 2001 some 14,000 new employees to its payroll.  

Hiring one year, firing the next... not exactly a stellar example of foresight and good planning, is it?  But it may be a good candidate for a case study in knee-jerk management.

Overseas, one former IBM U.K. executive expects this Big Blue subsidiary to cut about 3,000 jobs in Great Britain - about 15% of the total.  Elsewhere in Europe laying people off will be more difficult, due to the protective EU employment laws.  But IBM Europe has already been through all that some 10 years ago, so at least they will be walking down a well-trodden path.

No Funeral Lament: First the Band Goes, then the Director, then the Plant...

If IBM does close its Endicott facility, that will be like taking the torch to grandpa's and grandma's homestead.  Endicott is where IBM's roots are.  This is where IBM was nurtured from diapers into a Big Blue greatness.

But sentimentality and nostalgia has not been the hallmark of the "Louis XIX" reign, the former IBM emperor who still seems to rule the roost, even if from the shadows now.  

Last August, for example, Gerstner forced the 86-year old IBM Endicott band to disband.  The reason?  Cost cuts.  And that from a man who raided the IBM treasury to the tune of over $424 million, before heading off to the golf course, while IBM-ers brace for layoffs!? (see  "Sir Lou OutLayed Lay!", Apr. 1, 2002).

Here's an excerpt from a Poughkeepsie Journal Aug. 30, 2001 story:

ENDICOTT, Broome County -- As a boy, every chance he got, Charles W. Loudon (now 83) slipped over to IBM to hear the company band. He relished music at a time when it was harder to find; back in the 1920s his family didn't even own a radio. [...]

IBM recently decided to stop funding the band, which includes IBM workers and retirees who are musicians or vocalists. About half the musicians were willing to become a volunteer group, said longtime band director Stephen Stafford. But Stafford bowed out, and no other qualified director stepped forward.  [...]

As the economy slows, and the technology industry struggles, IBM is focusing its resources on ''core programs'' benefiting workers and the community, IBM spokesman Todd Martin said. So the company cut band funding, he said.  ''We, like every other business, are feeling the pinch,'' Martin said.

Neither Martin nor Stafford would say how much money IBM paid band members. Stafford called it a ''token amount.''

---

Anyway, if IBM does close Endicott, "there will not be a funeral lament" played by the now disbanded band, the former British IBM-er wryly noted.

IBM CEO vs. CFO: A "Yin" and "Yang" Story

Is New York Attorney General Missing Bigger Fish in His Backyard While Trying to Catch Smaller Fry?

Meanwhile, the New York State attorney general Eliot Spitzer, who has been cracking down on two-faced Wall Street analysts (see SEC Launches Formal Probe of Wall Street Research, Apr. 25, 2002), may be going after the relatively small fry while missing some bigger fish in his own backyard (Armonk, NY).  

Analysts and their employees are being threatened even with criminal prosecution for talking out of both sides of their mouths.  And with good reason.  But what about the executives who do talk out of both sides of their mouths?

Check out the mixed signals that the IBM CFO and the IBM CEO have been sending to the marketplace.  The CFO's optimistic remarks were made "on the record," during the IBM first quarter analyst call.  Following John Joyce's remarks, the IBM stock predictably rose four points (see "A Disastrous Quarter," Apr. 17).  The CEO's pessimistic comments were made in Palmisano speech to employees only (see "Sam Is No 'Change Agent'," May 6).  IBM shares tumbled about 7% to a new 52-week low following our publication of that Annex Bulletin: 

IBM CFO, the "Yang" (Apr. 17)

We remain very confident in the IT sector in general, and in IBM’s prospects.

IBM CEO, the "Yin" (Apr. 24)

If you look at the first quarter results of IT companies, it's clear that the industry is not bouncing back this year. [...] Quite honestly we did not have a good start to the year. 

IBM CEO, a "Yin"-turned-"Yang" (Apr. 30) (at the IBM Annual Meeting in Louisville, Kentucky)

While no one can predict the timing of a recovery, we remain optimistic that business conditions will improve later this year. And we're very confident that when the turnaround comes, we're going to be in position to capitalize.

IBM CEO, the "Yin" (Apr. 24)

And as I said earlier, it's a tough environment. Given that, we need to improve. [...]

* * *

IBM CFO, the "Yang" (Apr. 17)

We have the strength of our business model... IBM remains very profitable, very well positioned for the future, and continues to be the world's e-business leader.

IBM CEO, the "Yin" (Apr. 24)

We were building up investments in the company that were based on the assumption that we would have huge robust growth that is not out there any more. And we (not) just have to stay where we are but pare back.

* * *

IBM CFO, the "Yang" (Apr. 17)

We expect to hold or gain share in key segments of our industry as we move through the rest of the year and beyond... And our business model is already positioned to address our customers’ changing requirements, and to address the most profitable growth segments of the industry.

IBM CEO, the "Yin" (Apr. 24)

We all were hopeful that they would rebound quickly. You probably read a lot about these v-shape recoveries. Well, it doesn't appear to be the case... Project that out in 2003 and you see it's not going to be growing at 10 or 11 percent next year either.... Fundamentally we are in an industry that has too much capacity. And we really do need to understand that.

IBM CEO, a "Yin"-turned-"Yang" (Apr. 30) (at the IBM Annual Meeting in Louisville, Kentucky)

I also want to tell you how extremely privileged I am to have the opportunity to lead this company at one of the most exciting moments in our industry’s history... I could not be more excited about working for the best company in the world with the smartest, most dedicated people -- in our industry, to take IBM to even greater heights.

* * *

For IBM CFO John Joyce remarks - see transcript, Apr. 17, 2002

For IBM CEO Sam Palmisano remarks - see transcript, Apr. 24, 2002

For IBM CEO Sam Palmisano remarks at the IBM Annual Meeting - see (partial) transcript, Apr. 30, 2002

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Will the real IBM CEO please stand up?  For, IBM employees and shareholders have had it with all the yin-yang's and double-talk that have marked most of the nine years of the Gerstner administration.  They don't need it from the supposedly "new" CEO as well.  And they are evidently responding to Palmisano's mixed signals by driving the IBM stock down to new lows.

So if the lowly Wall Street analysts are being threatened with criminal prosecution for misleading investors, what do you suppose the principal actors in such sordid "Enronitis" replays deserve?  A taxpayer-paid "vacation" in Guantanamo Bay, including a shared cell with the Al Qaeda and the Taliban warriors?

How about it, Mr. Spitzer?

Happy bargain hunting!

Bob Djurdjevic

[Also check out"Sam Is No 'Change Agent'," (May 6), Additional Stock Buybacks Authorized (Apr. 30, 2002),  "From Here to Eternity" (Apr. 2001),  “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 5-year Forecast 2001: An Unenviable Legacy (June 2001)"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), Is IBM Cheating on Taxes, Annex Bulletin 99-17 (May 1999),  "Break Up IBM!" (Mar. 1996), Fortune on IBM (June 15, 2000), “Smoke and Mirrors Galore,” July 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) etc.]

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Volume XVIII, Annex Newsflash No. 2002-06
May 14, 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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