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IBM CORPORATE AFFAIRS
of New IBM CEO’s First “State of the Union” Address
Sam Is No “Change
Palmisano Said As Much Himself; Same Old Delusions, Some New Falsehoods; Annex Web Traffic Soars...
PHOENIX, May 6 - There is no doubt about it anymore. Sam Palmisano is no “change agent.” IBM’s new CEO is just a kinder, gentler version of Lou Gerstner.
“State of the Union” address to the Big Blue employees, delivered on
Apr. 24 from Somers, New York, contained the same self-delusions and
double-talk as the Gerstner’s various “vision statements” over the
years (see “Louis
XIX of Armonk,” Aug. 1996, for example).
“There is absolutely no
reason for us to change our strategy,” he said.
“We've got the strategy nailed, we need to fine tune some things.”
Meanwhile, the IBM stock is down 36% since its 52-week high ($126) on Jan. 9, having set a new 52-week low ($81) on Friday (May 3). Last month, the company reported a disastrous quarter even by comparison to John Akers’ days at the helm.
The Big Blue ship is leaking and creaking, and the new skipper says there’s no need to change. Just keep those fingers plugged in the leaks, as we rehearse the sinking ship drill at Armonk.
Well, investors think there is good reason to change. They are voting with their feet, just as we predicted back in January. Here’s what we said about what we expected from IBM under Palmisano:
“Is Palmisano likely to carry out some
badly needed radical reforms at IBM? (such as break it up - see “Break
Up IBM!”, March 1996, and "What's
IBM Really Worth?", Forbes,
Nov. 2000). Don’t hold your breath for it.
If Palmisano were not always “politically
correct,” he would not be ascending to the Big Blue throne right now.
He’d be were all other “radical thinkers” in Gerstner’s
Armonk ended up - out in the street.” (see “Gerstner’s
Legacy: Good Manager, Poor Entrepreneur”).
Thank You, Lou, Sam…
Meanwhile, with the Armonk leaders continuing to spew out bunk instead of inspiration and vision, the traffic at the Annex Research web site (http://djurdjevic.com) has been going through the roof relative to the same period of last year. The number of “hits” in April was up almost four-fold (+267%) over that in 2001, while the number of “pageviews” went up nearly six-fold (+461%). For the year, the corresponding web statistics are up 118% and 206% respectively (see the chart).
And guess which was the top visiting site? Yes, Big Blue (ibm.com). Accounting for 15% of total hits in April, the IBM readers surpassed even those from the Internet’s largest network (aol.com), which placed second with 12.5% of the total traffic.
Thank you, Lou, Sam!
In short, it appears that when the marketplace, including IBM, wants to find out the unvarnished truth about IBM, they turn to Annex not Armonk.
And no wonder, considering the soapy delusions and some outright falsehoods IBM-ers are hearing from Armonk.
What follows are excerpts from a Palmisano Apr. 24 “State of the Union” address, which has been already varnished ” by Sam’s handlers (“edited for content and continuity”). We’ve highlighted in red some of the particularly interesting passages. And we have inserted our own editorial comments in between the Palmisano lines. Finally, we have put it all together and in the context of our IBM forecast in the Summary section, at the end of this Annex Bulletin.
from an IBM Transcript
Palmisano, President and CEO
April 24, 2002, IBM President and Chief Executive Officer, Sam Palmisano,
hosted a worldwide employee broadcast from Somers, New York. Palmisano
reviewed IBM's first quarter performance in the context of current
marketplace realities. He also spent some time talking about IBM's
strategy and priorities for the second quarter. The following is a
transcript of his prepared remarks. The text has been edited for content
Good morning. I'm here today in Somers with many of our colleagues from across various organizations of IBM, all of our businesses and research functions. With me is the entire senior leadership team of IBM.
As you know on April 17th, we announced earnings. Regardless of all of our hard work, and believe me I know everyone worked very, very hard, we're disappointed. We did not meet our commitments to ourselves. We did not meet our commitments to our investors. And it is disappointing. [...]
But I want to set the record straight.
There are no issues with IBM's financial disclosure or accounting.
In fact, a couple of weeks ago the United States Securities and Exchange Commission came out with an unprecedented statement and said it had some questions for IBM, questions which IBM answered. The issue was closed immediately. So we have no accounting issues or disclosure issues with the SEC. The SEC called and apologized about what happened.
Bunk, Hegelian Dialectics
It (the SEC) felt badly about it — probably not as badly as we felt. Our stock was down $10-12 a share. But at least the SEC had the courage and conviction to go public on its position. And we really do appreciate that.
In all of the financial disclosure
discussions that have been going on for the past couple of months, there
are three issues that continue to come up: tax rate, share buyback and
intellectual property. I'm going to tell you right up front that our
handling of these three issues just makes good business sense — and I'll
explain why it makes good business sense. I think you'll see why we're
being viewed as a role model.
Let's start with tax rate. We used to have a 40 percent tax rate. I think most of you would agree with me that you don't think IBM as a company should overpay taxes. We should pay what we owe, but we shouldn't overpay. We felt that 40 percent was about 10 points too high, and our financial teams around the world worked very hard to get that tax rate down. And now it's 29-30 percent. That's good business.
It saves us money. We'd rather reinvest it in our business versus give it to governments for taxes. I hope you agree with me. I imagine you manage your household the same way.
Secondly, share buyback. Yes,
we have purchased a lot of IBM shares back. As a management team, we're very confident in the future of
IBM, and share buybacks has been accretive to earnings.
It's a positive contributor to IBM earnings. Our multiple goes up and our
stock goes up, which gives us a larger market capitalization to reinvest
in our business. Again,
this is just very good business.
We could have bought a bunch of dot-coms and then written them all off like some of our colleagues did. We didn't do that. We were very disciplined and we invested in ourselves.
The last one is intellectual property and it's the most incredulous of all. We invest in excess of $5 billion a year in research and development. We have brilliant scientists and technical people in IBM inventing things. We use some of the most wonderful inventions in our products and take them to market in our software, hardware, services. Other inventions we don't take to market for various business reasons. So we license that. We generate income on their inventiveness. What is wrong with leveraging the wonderful capabilities we have in our technical community? Now, because we invest so much money in research and development, we use income from intellectual property as an offset to expense. We could count it as revenue; we chose not to.
We've been doing it this way since we
began in 1987. So, there are no issues in intellectual property. These
accounting practices make good business. And anyone who has an agenda or
wants to start a rumor for whatever reasons can take a line item and pick
it apart say, this is a big problem at IBM or GE or some other really
prestigious world-class companies and get a headline or get some coverage
It's very important that you understand
there are no issues with IBM. And in fact we've gone from being called out
to now being viewed as a role model because of the way we've dealt with
the situation. Last night on CNBC, Laura Unger, former commissioner of the
SEC, spoke about IBM as a role model. And I'd like to run that video.
TV NEWS ANCHOR: So what do you think is the best solution? I mean, can the industry — can companies self regulate, is the SEC part of that solution? I mean, it's a very difficult question.
LAURA UNGER: I think you don't want the
SEC too involved in the details of corporate disclosure. Broad based
policy is a good way to approach that part of the SEC's responsibility. I
think it's helpful when you have corporate leadership such as IBM coming
out and saying more and really raising the bar of other public companies.
And we need to see a change and attitude adjustment in corporate America.
And I think that will go a long way towards providing more transparency...
PALMISANO: So that's behind us.
I'd like to get on something we can really
impact and do something about — and that's our business. I'd like to
spend some time talking about our business, because
quite honestly we did not have a good start to the
year. And as I said earlier, it's a tough
environment. Given that, we need to improve. Let me put all this in
First the numbers. Revenues were down nine
percent in constant currency. Our net income was down 32 percent and our
earnings per share down 31 percent. It was a very, very tough, tough
quarter. I'd like to add that we generated in pretax dollars — this is
after tax $1.2 billion — $1.7 billion of tax income. We also generated
about $4 billion of cash in IBM.
And I think when all the earnings are out,
it's going to be like it was last year — if you take the total income of
our top seven competitors and compare it to IBM's income, you'll see we
earned more than half of the profit that was earned in the industry.
We have a challenging environment to
operate in, but we don't have any long-term sustainable financial
problems. We're making more money than anybody else out there. We are also
executing in a very tough climate. I
want to go through what didn't go so well and what went well in 1Q. There
were some pretty positive stories in the quarter.
Let's start with what didn't go so well.
We knew we were going to have a tough first quarter because we exited the
fourth quarter under a very similar set of circumstances. We saw customers
deferring decisions. What happened to us, especially in our large
profitable servers and in software, was we just couldn't get all the
transactions closed. [...]
And public sector: Governments thankfully spend money in all kinds of economic conditions. And when they spent, we got more than our fair share, so we grew double digits there. We also grew double digits in Italy and Korea.
So there are several examples where we
were able to continue to grow the business nicely in a very, very tough
I want you to step back and go through
what's going on in the world. I don't mean this as an excuse. Most of you
who know me know I don't rationalize anything. I straight-talk, I deal
with facts. But I think we need to have all the facts on the table to
understand what we're managing through in this current environment.
The economies of the world, there's no doubt about it, are very slow.
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. I mentioned earlier capital
spending is depressed. All the customers I meet with say they're going to
spend, but they're waiting to see their business pick up. [...]
In addition to the macro economic
environment, we have to be cognizant of the fact that our industry
expanded at 10 percent per annum for more than a decade — huge growth in
the industry. We can talk about the dot-com bubble, we can talk about the
excess capacity that customers brought online to deal with Y2K. But fundamentally we are in an
industry that has too much capacity. And
we really do need to understand that. [...]
Even stalwarts, companies that you would have never thought would be tamping down expectations, are doing exactly that. Microsoft, with $32 billion cash on hand, came out and said they really see a tough year in 2002. EDS was another one that people thought was going to weather the storm better, until yesterday when they came out with their earnings. And they haven't weathered the storm so well in this environment.
Need to Change Strategy
[...] There is absolutely no reason for us to change our strategy. If you think about what I just said, everyone is copying us. HP and Compaq are copying us. Sun is trying to align with EDS to have a solutions play. Sun was once completely opposed to the open industry standard approach to computing and Linux. It's an endorsement, I think, of our strategy.
So there's no reason to make a major
If you look at what is going on in the
marketplace, you get back to what customers are saying. They want
solutions. They buy into e-business and the productivity gains it will
give them in a networked world. There is no reason to shift our strategy.
Let me remind you what the strategy is.
I'll give you maybe a Reader's Digest version of the strategy. Basically
we want to participate in all segments of the industry, in certain ways.
The industry consists of three layers:
Business insight or value — think of
this layer as systems integration, consulting and really some robust
software like Cross Worlds, life sciences, and so on.
Infrastructure — where 80 percent of the
industry is. Servers, storage, devices, middleware, all the stuff that
really defines IBM. We play in multiple domains. We have a vision for it
and I'll comment on that in a moment.
Technology — which fuels a lot of these
wonderful things that occur in servers and the infrastructure and the
like, and at the same time is a business unto itself where we create
incredibly wonderful custom chips for game machines. It's a business that
we've always said we want to be very focused, to carve out our segments
where we can differentiate based on our intellectual property and research
capabilities, and therefore make more money. And as things tend to be more
standardized over time, we like to migrate up the value chain, because
other companies play the scale game better than IBM. So that's the
strategy. Now let's talk about where we want to play.
We don't want to be the best consulting
company in the world. We want to help our customers transform their
business processes so that they can become the best supply chain or
customer relationship management company and so on. As we do that services
engagement, we want to pull our robust infrastructure solutions:
middleware, WebSphere, Tivoli. That's the point. We want to pull these
Our competition is aligning like crazy.
Accenture is aligning with Microsoft and others. We need to understand pragmatically that
we're going to have to align and pull our robust infrastructure solutions
through consulting engagements. Not only do we want to transform the
process, we want to build them on a robust infrastructure.
We have a vision of the infrastructure
that is quite different than many participates in our industry. We believe
it should be open and industry standards-based. We believe you can not
accomplish the scalability and security required in a proprietary way. Not
in a Web Logic way, not in a .NET way, not in an iPlanet way. We believe
it should be open industry standards-based.
That vision serves us very, very well in
servers and storage and middleware. It's not just a software statement. We
have a vision of where this industry is headed and where we need to
We built this strategy in an environment where the industry was compounding at 10 percent. This is a $1.2 trillion industry; it's not a small industry. Well, 10 percent growth is no longer occurring. Last year the industry declined 2-3 percent.
If you look at the first quarter results of IT companies, it's clear that the industry is not bouncing back this year. We can argue whether it's down again or flat or modestly up. But it's not going back to high single digits or teens. Then project that out in 2003 and you see it's not going to be growing at 10 or 11 percent next year either.
So although we've got the strategy nailed, we need to fine tune some things. 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.
The other point I'd like to make is an
anecdotal observation. The last time we went through an economic shift I
happened to be in services, and the U.S. economy was under a lot of
pressure. It was the early nineties, and IBM was almost on its death bed.
That's not the case at all today, this was a decade ago.
At that point in time,
outsourcing was viewed as a solution for
distressed companies. Who were our first customers? Continental Bank,
almost in bankruptcy. First American. McDonnell Douglas. None of them
exist anymore; they've all been merged or acquired by somebody else.
But they were the first outsourcing customers. And the whole value
proposition was to save them a lot of money fast.
The view of outsourcing changed
dramatically to strategic outsourcing, to e-business infrastructures, to
e-utilities. We now have $100 billion backlog in services. Outsourcing
became strategic --a different way to manage your IT infrastructure. [...]
We have got to continue gaining share. We've done it. When our competitors' first quarter results roll in, you will see we have held or gained share again. We would like to have gained more, but we didn't lose.
[...] Go do something that generates short-term revenue. So that's my suggestion. If you find you have more free time, don't take up golf lessons. Go help somebody help us gain share.
[...] What does that mean? It means that
when I get briefed before I visit a customer, I don't want to hear,
"I can't get things done because the brand won't do this, or finance
won't do that." You are in charge. You decide. You do it for the
cluster, because you're the closest to the customer. And we're going to
trust to you go do it right.
We've had no issue with the managing
directors, no problems whatsoever. In fact, all of last year our margins
went up. So we'll see what happens when we go to the next step. I'm
betting that we'll gain share and our margins will go up in the cluster
accounts too. So I'm very serious on this point. We need to free up
people's time to go out there and win in the marketplace.
Yes, there are complex solutions, Yes, I
understand it requires teamwork. But teamwork, in all due respect to the
people in this room, doesn't start in Somers or Armonk. It needs to start
in the field, where things are executed every day. And then hopefully it
will come back up to Somers and Armonk and we'll get coordinated at this
We have to take the assets of the IBM
company and leverage them in the marketplace. We have the opportunity of a
lifetime. We can take the share but to do it we need to be smart,
intelligent and quick.
And that’s it. That’s the bottom line of Palmisano’s “State of the Union” address to IBM employees… a plea to the field to help the HQ figure out which end is up.
So what do you think? Impressed with the new IBM CEO’s leadership skills? Ready to put your money where his mouth was? (i.e., invest in the IBM stock?).
If so, you’ll be evidently in a minority. For, a vast majority of investors are voting with their feet. They can see that Sam Palmisano is evidently no “change agent,” an attribute that boosted the IBM stock when Gerstner took over as a new CEO.
It follows, therefore, that change will be shoved down Palmisano’s throat by the marketplace, just as was the case with Sam’s first boss (Akers).
And so, the future once again looks like the past. To those, of course, who are students of history.
As for the rest, they may find little solace in the old saw, “those who don’t learn from history are doomed to repeat it.”
Happy bargain hunting!
[Also check out… 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), "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), 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), 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.]
Volume XVIII, No. 2002-13
Editor: Bob Djurdjevic
P.O. Box 97100, Phoenix, Arizona
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