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A SPECIAL ANNEX NEWSFLASH

An Analysis of IBM CEO's First Speech to Analysts

No New News at IBM

"Yin Yang Sam" Tap-dances Around Important Issues 

PHOENIX, May 15 - "Pass the hat around and buy the man some tap-dancing shoes!"  That's what this writer felt like saying after Sam Palmisano's first speech to Wall Street analysts.  The Big Blue chief's show-biz image was reinforced by an unfortunate photo that IBM chose to post with his remarks.  It made the affable IBM CEO look like a "Saturday Night Live" comic.

Back on the Big Blue stage, Palmisano tap-danced his way around pointed questions and ticklish issues.  He avoided talking about the looming IBM layoffs.  He ducked two probes about jettisoning poorly-performing units.  And he refused to respond to a leading question from a friendly analyst about when IBM would return to double-digit revenue growth.  In doing so, however, the IBM CEO provided the answer for the rest of us - never!  Or not any time soon, anyway...

Most of Palmisano's speech was a "déjà vu all over again" (stealing the line from Yogi Berra). It brought back memories of some past "vision statements" by IBM leaders that turned into empty promises.  The "Mountain Shook, Mouse Was Born" (Mar. 25, 1994), was the first "vision statement" Lou Gerstner delivered after his first year on the job (we strongly recommend that you read the above 1994 Annex Bulletin as a backdrop to today's Palmisano speech).

Gerstner said over eight years ago that "network-centric computing" would fuel the future demand for IBM products (see Item 3. of his strategy speech).  Now in hindsight, Palmisano derisively called the 1995-2000 period the "dot.com 'bubble'." (see the IBM/Sam slide #5)  

And what about Palmisano's view of the future?  It seems the same as Gerstner's in 1994.  Except that the new IBM CEO called it the "network era" in lieu of Lou's "network-centric computing." 

"The more things change, the more they are the same" (French philosopher Alphonse Karr, 1809-1890).

Want to know a really sad part about this "déjà vu all over again" example?  It's the seemingly perennial lack of imagination and creativity at Armonk.

What Gerstner pontificated eight years ago, which Palmisano has now regurgitated, wasn't an original thought, either.  DEC said it first 15 years ago (see Annex Bulletin 87-04, Jan. 1987):

Overall, this sounded to us as a rehash of DEC's marketing pitches from the 1986-1987 time frame (remember, the "network is the system; and the system is the network"-line? (see ANNEX BULLETIN 87-04, 1/20/87).

[an excerpt from  "Mountain Shook, Mouse Was Born" (Mar. 25, 1994)]

Back then, DEC was the second largest computer company in the world.  It had an aura of being able to walk on water.

And we all know what happened to Digital Equipment Corp. - R.I.P.  It has by now totally decomposed inside Compaq's corporate bowels. Which, in turn, also R.I.P, is now starting to decompose inside HP's corporate intestines.  

Bigger fish swallowing smaller fry to stave off the inevitable fate of hardware dinosaurs - extinction (see the  Industry Stratification Trend, Mar. 30, 1990).

"The industry is consolidating," Palmisano also said at one point.  No kidding... And IBM is no exception.  Evidently.

Taking advantage of the "network era"... What an "original" strategy!

At least now the investors have some guideposts for companies that pontificate instead of create.  The Doubting Thomas's can try searching the NYSE ticker (New York Stock Exchange) for the DEC or CPQ symbols.  They won't even find the carcasses anymore. 

Highlights of Palmisano's Remarks

On IBM Layoffs... Carefully avoiding the term "layoffs," a "dirty word" inside IBM, Palmisano only talked about the looming IBM job cuts euphemistically, under the "productivity" and "operational issues" labels.  

"We have operational issues that need to be addressed," he said,  adding, "make no mistake ladies and gentlemen, we are addressing them."

Answering an analyst question, Palmisano also said that IBM will continue to drive the productivity, and would "continue to take out $1 billion to $2 billion of costs every year."  

By using the term "continue," the IBM CEO was obviously trying to minimize the significance of the coming layoffs and make them seem as if they were "business as usual" at IBM.  Not so. IBM has not had to resort to major layoffs ever since the 1991-1994 period, when the IBM employment dropped from 344,000 to 220,000, while revenues remained virtually unchanged at about $64 billion.

Palmisano also flatly avoided answering a direct question about the layoffs by an analyst.  The analyst said that, based on IBM's shrinking revenues, a 6% or 20,000-job reduction seemed a reasonable estimate, given the company's drive to improve productivity.  "Why should we not expect that?", the analyst asked.

Palmisano tap-danced around the question, never answering it directly.  He said that, while the question made sense from a "macro" standpoint, IBM has many different business units with different productivity metrics.  He implied that some employees may be redeployed across different IBM operations, rather than laid off.

Trying to play down the severity of the coming job cuts, the IBM CEO also said that if the company were to stop hiring, it would lose about 15,000 jobs per year through attrition.  But he admitted that a countervailing factor are the new employees IBM Global Services takes on through outsourcing deals.  

(The more outsourcing contracts an IT services vendor wins, the more overhead it takes on.  Which it then tries to cut so as to make money on the deal.  That's how the game is played.).

Palmisano finished his tap-dance around the layoffs question by saying, "you'll hear more about we are doing about it."

When?  Nobody asked that.  But a "deep throat" inside the Big Blue sources suggested probably within a week or so. "Your timely note ("Sam Is No 'Change Agent'," May 6) threw IBM into disarray," this source said before today's IBM meeting.

On "Industry Woes"... Palmisano repeated his earlier remarks that "the industry has too much capacity," and that the IT segment shrank 3% last year.  "The industry contracted last year for the first time in many years," Palmisano said.

While we have seen no data supporting such a pessimistic industry view, there is no question that IBM, whose revenues did decline 3% last year, does have too much capacity. 

Is the new IBM CEO megalomanically starting to (mis)interpret the "I" in the IBM name as the "Industry?" 

One only needs to consider Computer Sciences Corp.'s (CSC) stellar results in the fiscal year 2002 and the fourth quarter (ended Mar. 31), reported yesterday, to appreciate the fallacy of Palmisano's "industry woes" claim (stand by for a regular Annex Bulletin about CSC - click here to read it).  In response, the CSC stock promptly soared 12% today.

On the other hand, one also only needs to consider the latest Hewlett-Packard (HP) business results, also reported yesterday, to understand where Palmisano may be coming from.  The HP revenues were down 9%.  The stock promptly dropped 6%.

So there may be "two IT industries" - the old and the new; the hardware and the services; the sick and the healthy one.  The hardware-laden industry old-timers, such as IBM, HP and the Japanese vendors, for example, are struggling.  By contrast, the services companies, such as CSC, EDS, Accenture, etc. continue to grow despite the capital spending slowdown, albeit at a slower pace (see the  Industry Stratification Trend, Mar. 30, 1990).

Since IBM plays on both sides of the fence - in the hardware and in the services game - the new IBM CEO seems to be picking the facts from whichever side that supports his conclusions.  This practice may be earning him a new epithet - the "Yin Yang Sam."  The old one - the "Teflon Sam" - is now becoming obsolete anyway, with his ascendance to the Armonk throne.

On IBM Market Share "Gains'... It was also rather funny hearing again today the IBM/Palmisano assertion that the Big Blue is supposedly gaining market share.  This may be true by comparison to the fellow-dinosaurs that are falling apart faster than IBM's hardware units.  But it's a preposterous claim relative to the nimble IT services competitors which are growing while IGS is shrinking.  

Guess trying to weasel his way out of this tight spot, Palmisano quoted today Gartner Group and IDC as sources of his market share claims.  He didn't say how much money IBM is spending on these two companies' research.  Nobody asked, either.

On Closing "Corporate Welfare Centers"... The IBM CEO was asked several times today if he was considering jettisoning some of its  poorly-performing units, such as the PCs, microelectronics or storage (which was our recommendation back in 1996 - see "Break Up IBM!", Mar. 1996).  

Palmisano carefully dodged those questions, implying the company will continue to keep its losers.  As the old saying goes, "one is known by the company one keeps." :-)  

But Gerstner evidently never figured that out.  And now, it looks like Palmisano hasn't, either.  So he is opting to keep the IBM "corporate welfare centers" open, even though there is little hope for recovery of its chronically ill patients, and despite their drain on IBM's cash and image.  

Meanwhile, IBM did close the 86-year old Endicott music band to save money (sad but true... see "Looming IBM Layoffs", May 14).

Well, what can we add that we haven't already said... "Sam Is No 'Change Agent'" (May 6).  He proved it again today.  So stand by for the IBM stock to resume its downward slide.

Happy bargain hunting!

Bob Djurdjevic

[Also check out"Looming IBM Layoffs" (May 14),  "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), "Mountain Shook, Mouse Was Born" (Mar. 25, 1994) etc.]

Or just click on and use "financial engineering" as keywords.

 






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Volume XVIII, Annex Newsflash No. 2002-07
May 15, 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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