CNNfn

September 3, 1996

(this four-minute interview was broadcast “live” at about 11:15 a.m.)

 Will Big Blue Stay Blue So Long It Is Big?

CNN: Can IBM keep up with the pace of change in the tech sector? Bob Djurdjevic of Annex Research will tell us next why he thinks Big Blue must break itself into smaller parts.

[Digital Jam logo and headline music]

Good morning!  I am Fred Katayama, sitting in for Steve Young.  It’s Tuesday, September 3rd, and this is Digital Jam.

We’ll take a quick break, and then the question: Is IBM too big to compete in the rapidly changing computer market?  Up next... Bob Djurdjevic of Annex Research will tell us what he thinks Big Blue should do.  This is CNNfn where it is “business unusual.”

[commercial break]

CNN: Big Blue may appear to be roaring back, but some say it will stay blue so long as it is big. 

Bob Djurdjevic is one, a widely quoted IBM analyst, isn’t sparing in his criticism of Lou Gerstner’s reign at IBM.  He calls him - “Louis XIX.”

To find out why, Bob Djurdjevic joins us today at our (New York) studio.  Bob is an analyst at Annex Research in Phoenix.

Welcome to Digital Jam, Bob!

Djurdjevic: Hello!

CNN: Why are you so highly critical of Lou Gerstner?

Djurdjevic: Actually, let me first put the record straight.  Lou Gerstner was the person whom we had welcomed as an outsider to IBM, at the time when IBM was hemorrhaging as a company...

CNN: [interrupting] He came from RJR...

Djurdjevic: Indeed... and IBM was indeed in need of tough management.  Certainly, Lou Gerstner has provided that.

He was rated on our score card of IBM CEOs as an “A” in May 1994, when he finally reorganized the company into the industry units, cut back on the costs expenses, and so on...

CNN: And certainly the stock is up since then...

Djurdjevic: And during Gerstner’s era the stock has gone up... It was somewhere around $50 or less at the time he came on board.  Now it is between $90 and in $115-type range.  So certainly, he deserves credit for what he has done.

CNN: But what’s wrong?

Djurdjevic: My concern is the future of the company... and whether or not IBM can once again become a great company that it once was.

To do that, the company needs to do business in a different way.

To begin with, the shareholders certainly... although the IBM stock has gone up since 1993, in the last year or so, it’s been pretty well where it is today.

CNN: When you say break up IBM, why the need to break up IBM?  I realize that AT&T is a technology stock which split up a year or so earlier...

Djurdjevic: Because one IBM, the giant corporation that it is, has a lot of hidden value inside its bowels which the marketplace does not recognize.  And the IBM shareholders, therefore, do not receive value for (it).

For example, take IBM services...

It is by far and away the most successful part of the company in the 1990s, growing and two to three times the rate of the largest competitors.  Yet it is stuck with the same P/E ratio of 10, which the IBM corporation has, while its less successful competitors, like EDS and CSC, for example, trade at P/E ratios of 24 or 25.

CNN: So what you’re saying, Bob, is that IBM would be worth more broken up, than it as a whole.  Who would buy it?  Who would buy a split up IBM like that?

Djurdjevic: Well, I am not suggesting that pieces of IBM should be sold off.  Although some parts which are losing money, or are not producing the kinds of margins that IBM needs, should perhaps be sold off.

What I did say is that the parts of the company, like let’s say... IBM services or software, for example, could be retained, in terms of ownership, by IBM’s current shareholders.  But (they) could be run and operated as separate companies.

CNN: Do you think that will happen?

Djurdjevic: Well... [chuckling] not according to what Gerstner has said.  In fact, what prompted our report, the one in which we called Gerstner “Louis XIX,” was just that kind of imperial attitude toward the position of hands-on management.  Which was once needed, and Gerstner did a very good job at.  But now, the time has come to cut the strings, and to let the very competent executive that IBM has running these different lines of business, do their job.

CNN: Okay, Bob, we shall see...  Thanks for sharing your thoughts and views with us.  Our guest was Bob Djurdjevic of Annex Research.  You’re watching CNNfn “business unusual.”