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A SPECIAL ANNEX NEWSFLASH

Analysis of IBM Insiders' 2004 Trades

Changing of the Guard

Palmisano Reshaping the Board; Some Executives Building Retirement Nest Eggs?

PHOENIX, May 28 - A change of the guard is quietly under way at Armonk.  Two years into his tenure as IBM's top executive, Sam Palmisano is starting to make his mark on Big Blue's Board and culture.  He has added three new directors.  He has changed the rules under which stock options are exercised (see IBM: Greed De-clawed?, Feb 2004).  And he has just put his money where his mouth was.  Earlier this week, he acquired 40,984 IBM shares exercising his $18.66 stock options granted in 1995.

To be fair, we should point out that Palmisano also sold nearly a half (19,674) of those shares at $87.20 apiece, yielding just over $1.7 million and an estimated pretax gain of about $1.35 million.  (The company said he did it to cover the exercise price and the taxes).

But Palmisano KEPT the other half.  And that's something that hasn't been done in any discernible by any IBM executive ever since the former IBM CEO Lou Gerstner ushered the "Era of Greed" into Armonk circa 1996 (see  "Some Insiders Cashed In On IBM Stock's Rise, Buybacks", May 1997,  “Executive Suite: How Sweet!,”, July 1997, "Gerstner: Best Years Are Behind", Aug, 1999).  IBM executives sold gobs of Big Blue stock acquired at heavily discounted stock options prices, but scant few of them kept any of it in the last eight years - hardly a vote of confidence in the company whose bright future they were plugging publicly.

But while Palmisano is starting to accumulate the shares of the company he leads, some IBM executives seem to be building their retirement nest eggs, and some Gerstner Board appointees (e.g., Alex Trotman, John Slaughter, Lucio Noto) are cashing in on stock options - in preparation for departure? (see the chart).

Nick Donofrio, for example, a senior VP in charge of technology and manufacturing, stands out for his insider trades in the last 17 months.  

Exercising his stock options like clockwork every three months after IBM's quarterly releases, Donofrio has sold about $24.7 million of IBM shares since February 2003, for an estimated pretax gain of about $18.5 million (see the chart).  Guess Donofrio doesn't want to build his retirement nest egg out of Big Blue shares?  (He still holds about 125,000 as of May 2004, according to the IBM filing).

But Donofrio is an exception among the current IBM executives.  Even if they have not added to their Big Blue stock holdings in any measurable way, as Palmisano has just done, most have refrained from giving such "optimistic" (sell) signals to the marketplace.  And that's a big change from the "Era of Greed" that marked the “Louis XIX of Armonk” reign.

Reshaping the Board

Palmisano's first three appointees to the IBM Board represent a mixture of cement, rubber and cash (reflecting the three industries from which the appointees hail).  If there is anything that the two men and the woman - IBM's new directors - have in common, it is their internationalism.  

Lorenzo Zambrano, 59, is chairman and CEO of Cemex, a Mexican cement and ready-mix concrete multinational.  Carlos Ghosn, 49, is co-chairman and CEO of Nissan Motor Company, having learned his auto trade with Michelin and Renault in France, Brazil and the U.S.    Joan Spero, 59, is a member of the influential Council on Foreign Relations. 

What makes Spero the "cash" addition to the IBM Board is her career at American Express (1981-1993), the company from which the former IBM CEO Lou Gerstner also hailed.  No wonder she and Ghosn have also been named to the Executive Compensation Committee which also decides on Palmisano's income.  

(For 2003, the IBM CEO earned nearly $7 million in salary and bonuses, up 17% from the year before, and was awarded 250,000 in stock options, estimated at about $17 million in pretax gains under the current terms and prices).

So what do we think of Palmisano's new appointees?  Well, it is about time the Board of a company that has borne the name "International" for over 80 years now, and which derives most of its revenue and profits from non-U.S. markets, reflects that reality.  That's one of the five recommendation we made to Gerstner in May 1993, when he took over the IBM helm (see “Gerstner: The Untold Story”, Dec 27, 2002).  It was the only one he ignored.

The stock market has also largely shrugged off so far Palmisano's "changing of the guard" and the cultural changes.  The IBM stock is down about 5% for the year, having under-performed both the S&P 500 and the Dow Jones Industrials of which it is a part.  

Is that why IBM is reverting back to the Gerstner-style stock buybacks?  If so, the tactic evidently isn't working.  Copycats are never as good as the originals; not even when it comes to squandering billions of dollars on Wall Street bribes.

So perhaps Palmisano should try something really "original" - such as investing IBM shareholders' money in the business of business (see IBM: Five-year Forecast, Apr 8).  And if IBM starts to grow as a result, who knows... maybe Wall Street might also take notice the underlying change of the guard at Armonk?

Happy bargain hunting!

Bob Djurdjevic

P.S. Happy Memorial Day, to our U.S. clients and friends!

For additional Annex Research reports, check out... 

2004 IBM/IGS: Going Retro with Mainframes (Apr 8);  IBM: Five-year Forecast (Apr 8);  Mainframe at 40! (Apr 2);  "Crown Jewel" Restored? (Mar 2004);  IBM: Greed De-clawed? (Feb 2004); Hype Exceeds Results (Jan 2004); "Five Most and Least Likely Forecasts for 2004" (Jan 2004)

2003 IGS:  "IBM OnDemand: Different Strokes for Different Folks" (Dec 2003); "Investing in Growth" (Apr 2003)

2003 IBM: "IBM vs. HP: Spinning Global Server Market Shares" (Nov 2003);  "Finally Heard, Part II," (Nov 2003), “Small Is Now Big at Big Blue” (Oct 16),  “On the Nose But No Cigar” (July 16), “A Paler Shade of Blue” (June 2), “Save, Spend and Split” (May 8), “Shrunk by the Marketplace” (Apr 17), “Turnaround Continues...” (Apr 15), "Finally Heard!" (Jan 29), “Start of a Real Turnaround?” (Jan 17).

2002 IGS: "Half or Double Trouble?" (Aug. 12, 2002), "IBM to Take $500M Charge" (Sep 3, 2002), IBM-PwCC Update (Oct 2, 2002), Analysis of IBM Second Quarter Results (July 17, 2002), IBM Layoffs Confirmed! (Aug 14, 2002), Analysis of IBM Third Quarter Results (Oct 16, 2002), Boom Amid Gloom and Doom (Oct 10, 2002)

2002 IBM: “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), Big Blue Salami (June 19), "Looming IBM Layoffs" (May 14), "IBM 5-Yr Forecast: From Here to Eternity?" (Apr 2002),  “Tough Times, Soft Deals,” (Apr 25, 2002), “Gerstner’s Legacy: Good Manager, Poor Entrepreneur” (Jan 2002), IBM Pension Plan Vapors: Where Did $17 Billion Go? (Mar 2002), "Sir Lou OutLayed Lay!" (Apr 1, 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, 5/27/97,  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), Industry Stratification Trend (Mar. 30, 1990) etc.]

Or just click on and use "financial engineering" or similar  keywords.

Volume XX, Annex Newsflash 2004-12
May 28, 2004

Bob Djurdjevic, Editor
(c) Copyright 2004 by Annex Research, Inc. All rights reserved.
e-mail: annex@djurdjevic.com

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