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Updated 6/06/02, 11:25 a.m.  PDT (service sector comment added)

IBM to Lay Off Another 1,500 in Microelectronics Unit

Sam's Dull Scalpel

 Creeping Layoffs Seen as Creepy Layoffs by IBM Employees

IBM to Write Off $2B to $2.5B

PHOENIX, June 4 - IBM's creeping layoffs are being seen more as creepy layoffs by an increasing number of Big Blue employees, according to the feedback we are getting.  This became especially pronounced today as IBM slashed another 1,500 jobs in the Microelectronics division. 

The CBS Market Watch columnist, Mike Tarsala, also agrees.  "It makes you wonder what else IBM's executives are hiding when they can't flat-out tell shareholders how many employees they've jettisoned so far this year and how many cuts they are targeting," he wrote in his June 5 column.

"That's like operating with a dull scalpel," we said in some media interviews today (June 4). "Piecemeal surgery only prolongs the agony as it puts off the inevitable."

And the inevitable is that IBM will have to cut more... sooner or later. Because the malaise from which it is suffering is pervasive.  And self-inflicted.

Pervasive, because it is an affliction from which the entire hardware sector of the IT industry is suffering.  Self-inflicted, because IBM exacerbated its own problems by investing $5 billion only two years ago into its pipedream, "just as the semiconductor industry began its worst-ever downturn," according to a Reuters' report (also see Annex Newsflash "Looming IBM Write-offs," May 23).

Here's, for example, what HP is doing about it (see HP Cost Cuts in the Cards?, CBS Market Watch, June 3):

BOSTON (CBS.MW) - Hewlett-Packard is expected to give its first post-merger financial forecast since the acquisition of Compaq at a meeting with analysts meeting on Tuesday. H-P chief executive Carly Fiorina will take the podium at the Boston meeting to discuss her blueprint for a company that is embarking on its biggest transformation in history. […]

Although H-P officials have stressed that they believe a more-streamlined and better-focused company will emerge in the coming years, some analysts remain skeptical. Bob Djurdjevic of Annex Research in Scottsdale, Ariz., said that both H-P and Compaq should have learned from IBM that their futures resided in computing services and not in reliance upon hardware offerings.

"They are going to prolong their life as much as possible by playing tough defense," Djurdjevic said. "For H-P, that means relying on printers because that's their cash cow. But services are at the top of the food chain now and they should have seen that in the 1990s."

As you saw or heard in today's HP meeting in Boston, cost cutting was the name of the game, as the HP CEO, Carly Fiorina, said she no longer saw any hope for a recovery this year. So...

"Cost-cutting is really the only tangible benefit from the merger," said Bob Djurdjevic of Annex Research in Phoenix. "But I did not hear anything to suggest they realize that services is where the game is."

(see Cost-cutting Rules Day at HP, CBS Market Watch, June 4)

And then here's IBM, still tinkering instead of cutting.  And hoping to outsource the Microelectronics' R&D capabilities at a time when all of the Microelectronics customers are cutting back R&D and other costs and expenses.  

Has John Akers reincarnate taken over the Big Blue reigns?  Would someone offer Sam Palmisano a glass of reality?  For, today's  Gerstner/Palmisano Big Blue is walking in the John Akers footsteps from 10-12 years ago.  

Some people never learn... No wonder the Annex web site hits continue to go through the roof, and IBM.COM continues to be the No. 1 visiting site (accounting for 16% of total hits), even ahead of the Internet's behemoth AOL (with 13%):

When IBM employees want to find out the truth about IBM, many increasingly turn to Annex, not Armonk. 

 Happy bargain hunting!

Bob Djurdjevic

IBM to Write Off $2B to $2.5B

P.S. Just we we went online with this Annex Newsflash, IBM released the news after the markets had closed that it expects to take a $2 billion to $2.5 billion pretax charge related to the sale of its hard luck business... oops, we mean the hard drive business... J Hitachi,  and to job cuts, now totaling just over 5,000.  No surprise there... (see "Looming IBM Write-offs," May 23).

But IBM also scheduled a surprise 5pm (EDT) teleconference with analysts.

"We're serious about our chip business, and we are in it to stay," John Kelly, senior vice president of the IBM Technology Group, told the analysts during the conference.

That's what Digital Equipment Corp. (DEC) executives also said in 1996, 1997, 1998... before that company, once the second largest computer vendor in the world, became history in the bowels of Compaq, now also gobbled up by HP.

Whatever Happened to IBM-Dell "Megadeal?"

We know that Wall Street memories have always been short.  And that IBM has always talked up a storm and usually delivered a whimper.  But with the IBM-Hitachi deal about to be consummated, wonder why no one among the analysts is asking IBM the question about whatever happened to that much ballyhooed $16 billion "megadeal" between IBM and Dell, announced with a lot of fanfare in March 1999?  

To refresh your memories, here's an excerpt from the Annex Bulletin 99-08 (Mar. 5, 1999) headlined "King, Prince of 'Fluff' Spin More "Fluff" into Market":

Dell and IBM, the king and the prince of "fluff" (the market capitalization-over-equity ratio), have just spun more "fluff" into the market. Taken at its face value, the two companies announced yesterday a $16 billion, seven-year deal. And the gullible "investors," read gamblers at the Wall Street Casino, lapped it up as if the "fluff" were real gold. Which is why we invented the "fluff" ratio last year, ranking the computer companies we follow by their market cap-over-equity, not price-earnings, ratios.

Wall Street gamblers unaware of such caveats, sent both IBM and Dell shares soaring yesterday, helping push the Dow Jones Industrials by 192 points, or by 2% of its value. IBM was up by over 10 points at its high, boosting its market cap by over $10 billion, before dropping back later in the day. Dell was up by about six points at its daily high, for about an $8 billion swing on the IBM news. Dell shares also fell back later in the day.

One could hardly have imagined a better example of both, today's market volatility, and its perversion. Within a matter of hours, about $18 billion of new "wealth" was created out of thin air, riding on the companies' hot air news balloon. And then much of it evaporated, again within a matter of hours, as the hot air turned to cold reality. Meanwhile, it was mostly the traders (i.e., the "house"), not the long-term investors, who made out in the process.

A scam a day keeps the doctor away?

To read the rest of the above story, click here.  

But to try to figure out how much of the IBM-Dell "fluff" is being written off within IBM's $2B to $2.5B charge, you needn't go any further. For, the answer is - probably very little. Most of that "megadeal's" $16 billion-"value" disappeared a long time ago.  Quietly. As is usually the case with "fluff."  And without anyone on Wall Street raising such matters with IBM or with the investing public. 

So let us ask the question then: "Whatever happened with the benefits IBM said it would get from the $16 billion-Dell deal, Sam?"

Our answer?  It is the same as it was the day the "megadeal" was hailed by everyone in the major media (Mar. 5, 1999).  We said the IBM-Dell deal will likely live up to its advance billing...

...when Northern Siberia hosts the world's first championship of golf; when the month of February has two blue moons; when there is a snow storm in Singapore; or when Bill Clinton tells the truth about his sexual escapades.

Is that why no one is talking about it anymore?

What "Recession?"

To hear IBM and HP executives blame their companies' woes on the supposed economic recession, you'd think that everybody was struggling. We've already told you that wasn't so:

This (IBM/Palmisano assertion) suggests that the IT vendors and the US economy come from two different planets.

 (see "IBM 5-Yr Forecast: From Here to Eternity", Apr. 2002)

And we've also already said (many times during the last 12 years!) that the services sector is the top of the industry's food chain, and therefore, the place to be.  Now, the Wall Street Journal has also said it, citing the latest economic survey in its today's (June 6) edition.

Here's an excerpt:

May's Growth in Services Sector Best in Two Years


Business activity in the service sector grew at its fastest rate in nearly two years during May, hand in hand with an increase in order backlogs that could sustain the sector through the summertime. [...]

Nonetheless, the index's increase to 60.1 in May, from 55.3 in April and 57.3 in March, is an encouraging sign. For starters, it is one of the few early measures of the vitality of the service sector, which accounts for about 84% of the nation's economic output. [...]

The index is based on a survey of about 370 purchasing managers in more than 62 industries ranging from financial services to agriculture. An index reading over 50 signals an expanding service sector.

Ralph Kauffman, who chairs the institute's non-manufacturing business survey committee, notes that businesses reported rising back orders for the first time in 17 months. "That shows we should have continued growth in activity in the next few months," he says. [...]

Click here to read the full article (but you have to be a WSJ subscriber). 


Sam, Carly... what "recession" are you talking about?  The only contraction we see is in the supply of corporate visionaries who know how to transform losers into winners.

Even some Wall Street portfolio managers are starting to recognize that.  The All American Equity Fund, for example, which takes long-term positions in blue-chip U.S. high-tech and telecom companies with strong growth potential and relatively modest valuations, has made the two leading IT services companies - EDS and Accenture - two of its top stock picks (see the CBS Market Watch report, June 6).

So the hardware sector blinders are slowly coming off... about 12+ years too late (see Industry Stratification Trend, Mar. 30, 1990).

[Also check outSam'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.]

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


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Volume XVIII, Annex Newsflash No. 2002-09
June 4, 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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