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Updated 5/23/02, 10:30 PDT (Laid-off worker's comment added)

IBM Finance Functions Told to Write Off Assets

Looming IBM Write-offs...

 Like Gerstner in 1993, Palmisano Set to "Clean House?" How Big Will the Second Quarter Charge Be? 

PHOENIX, May 23 - A man told me the other day he had Parkinson's disease.  He seemed overjoyed.  

Overjoyed?  Yes.  Because for months, he and his doctor suspected a brain tumor.  "This (Parkinson's) can be controlled with medication," the man said.

Similarly, when the village of Endicott, NY, learned today that 225 of some 4,500 local IBM jobs would be cut, a perceptible sigh of relief spread throughout the Binghamton area.  Some had feared the entire site may be closed.  So 5% of the IBM local work force feels like a reprieve by comparison.  Except to the 5%, of course.

IBM Location

Total IBM Employment

Announced Layoffs

Endicott, NY


225 (5.0%)

Poughkeepsie, NY


144 (2.4%)

Rochester, MN 5,000 150 (3.0%)
Research Triangle (NC) 14,000 140 (1.0%)

Furthermore, since the announced cuts were only in the server area, and the NC-based ones were only corporate staff, chances are this is only the beginning, rather than the end, of IBM layoffs.

Indeed, it is only the "tip of the iceberg," said one IBM employee who was laid off today: 

From the evidence today, it's also clear that there is a lot more coming. Why? Well, those of us in Endicott have been given a termination date of 7/22 -- i.e., a 60 day-notice. Those in Rochester were only given 30 days. Why would that be?

The WARN Act requires employers to provide a 60 day-notice if there are more than 500 layoffs.... and all layoffs within a 30 day-period must be counted. Since only 225 were announced in Endicott today, that means that at least 275 more are coming here. (There are pretty strong indications that layoffs in Global Services will be announced next week.... and there are approx. 1,000 IGS employees in Endicott.)

While much has been written in the last three weeks about the IBM people cuts, there are other ways of skinning the cutback cat, too.  Like asset write-downs.

Some of our IBM insider sources are telling us that the order went out to the finance functions across the company, including the IBM Global Services (IGS) unit, to write off as many assets as possible in the current quarter.

Why? "They want to justify and explain away the downsizing that is taking place," our source, who works in the finance area of IBM, said. "They want to clean the books for Sam" (Palmisano).

Time for another timely visit by Yogi Berra and his timeless quote: "It's deja vu all over again."  

Nine years ago, Lou Gerstner in his maiden quarter as new IBM CEO did exactly the same thing.  He wrote off nearly $9 billion, or about 15% of IBM revenue back then.  It was the largest IBM write-off in history.  Some 180,000 Big Blue jobs were eliminated over the following 15 months.

And Wall Street loved it. After setting several 18-year lows, the IBM stock shot up three points on the day the huge write-off was announced (see "Record Write-off!", Annex Bulletin 93-40, 7/29/93).  But it took another three years and a Wall Street bribe in the form for stock buybacks for the Big Blue shares to really get moving (see the chart).

"One man's pain is another man's gain" - could be another way of describing Wall Street's reaction to layoffs.  Or "Main Street's pain is Wall Street's gain," at least in terms of cost cuts.

Looks like Palmisano is following in his former boss's footsteps.  Using the same methods, he is hoping to recreate the perception of a positive "change agent" at IBM.  Except that he doesn't seem to be cutting as deeply as Gerstner did nine years ago (15% of IBM revenues today would be nearly $13 billion... and we don't expect the second quarter write-offs to be anywhere near that figure).

Will it work again?

It might, despite the saying, "once burnt, twice shy."  For, Wall Street investors seem to have short memories and infinite pain thresholds.  And plenty of cash looking for targets.  The Big Blue is a big target.  

Plus, the IBM Board authorized late last month another $3.5 billion for share repurchases (see Additional Stock Buybacks Authorized, Apr. 30, 2002).  Think of it as a giant (Wall Street-size) painkiller. :-)

 Happy bargain hunting!

Bob Djurdjevic

[Also check out"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),  "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. 2002-08
May 23, 2002

Editor: Bob Djurdjevic
Published by Annex Research

P.O. Box 97100, Phoenix, Arizona 85060-7100
TEL/FAX: (602) 824-8111

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