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A Bob Djurdjevic's Column in...

Global Technology Business

  London, United Kingdom

  February 1998 issue


Renowned 'IBM Watcher' Bob Djurdjevic gives his reaction to IBM's decision to award Lou Gerstner a new five-year contract

Five more years of Louis Gerstner at the helm of the Big Blue? "Yikes!" IBM employees and its American Main Street suppliers may be lamenting. "Yahoo!" IBM competitors, Wall Street investors and FORTUNE 500 customers and suppliers could be cheering.

For, having Louis Gerstner, alias "Louis XIX of Armonk," run the IBM Company for another five years means:

  • Five more years of fluff over substance;

  • Five more years of cuts instead of growth;

  • Five more years of throwing good money after bad;

  • Five more years of exporting American jobs overseas;

  • Five more years of putting personal interests of Armonk's "aristocracy" ahead of that of the IBM Company;

In short, a disaster if you believe in substance; a bonanza, if you like the PR fluff.

IBM's third quarter revenue growth, for example, was a groaner - 3%. Four of IBM's five business segments had been flat or declining in the recent quarterly reports. Even its only growth area - services - slowed down in the third quarter to below 20%. IBM's equity dropped; its liabilities grew; its cashflow was negative.. yet its stock soared! Go figure...

The two million stock options which the IBM directors awarded "Louis XIX of Armonk" in November to make him stay five more years certainly qualifies as throwing good money after bad. It also demonstrates anew that Gerstner's compensation is running ahead of that of the IBM's performance.

No wonder. All three members of the IBM Executive Compensation Committee were appointed by Gerstner early on in his tenure at the IBM helm (C.F. Knight in 1993, A. Trotman and C.M. Vest in 1994).

"Scratch my back and I'll scratch yours?" You bet. This IBM chairman has certainly elevated the moral corruption in the American corporate boardrooms to new heights. The two Watsons, who built the Big Blue into one of the world's greatest companies, might be turning in their graves at such a brazen example of self-dealing by an IBM CEO.

IBM has also squandered over $16 billion of its shareholders' money creating an illusion of prosperity by buying back its stock. Gerstner's IBM had spent more money investing in its P/E ratio in the first nine months of 1997 than it did on IT products or software investments. And in late October, the IBM Board approved another $3.5 billion for stock repurchases.

More worryingly, as IBM was buying back its stock by the billions, some insiders were exercising their stock options by the millions, Gerstner included.

IBM employees should brace themselves for Gerstner to wield his axe again because of its lack of growth. (It's one of the few things he is good at. Don't be surprised, though, if such cuts are spun as "good news" stories.)

On Nov. 17, the Wall Street Journal reported that IBM was planning to build a $700 million computer chips making facility in upstate New York, which would generate 400 new jobs. Gerstner and the New York state's governor, George Pataki, never mentioned, however, the thousands of jobs which IBM is about to cut.

Nor did anyone mention IBM's deal with Dongbu Group, a Korean conglomerate, to which IBM had agreed to transfer some of its chips technology only 11 days earlier. According to a Nov. 6 Korea Herald report, the Dongbu-IBM contract will result in about a $2.1 billion investment in the new semiconductor manufacturing facility, and 1,000 new Korean jobs.

Now, even the most elementary economics students could conclude from the preceding that 600 American jobs and about $1.4 billion in investments had just crossed the Pacific - heading WESTWARD from the U.S.! (Editor's note: Due to the Korean financial crisis, this agreement has been put on hold).

"Louis XIX of Armonk" decided over two years ago that the Big Blue needed a new, modern HQ building at Armonk. Never mind that most multinational companies' HQs in the Westchester County, NY, area were looking like ghost towns. And even though IBM was unable to sell its old headquarters building for over two years now, Gerstner plunged ahead with the costs of building a new one - an example that cost cutbacks expected of others don't apply to the Emperor's palace.

French king Louis XIV was similarly vain and out of touch with reality when he ordered the construction of the Versailles. He, too, considered the Louvre an old-fashioned and an insufficiently modern palace.

Those who think that GREED and VANITY are acceptable principles upon which to run IBM for another five years, should contemplate what eventually happened to the former masters of the Louvre AND of Versailles.

Moral of the story? Money and technology will never be a substitute for ETHICS and MORALITY! Which is why a resounding "yikes" was this writer's reaction to five more years of Gerstner.


ATTRIBUTION: Bob Djurdjevic is president of Annex Research, a Phoenix-based market research and consulting firm (http//www.djurdjevic.com).  The views represented here are not necessarily those of GTB.


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