The markets didn’t agree. Within two days the company’s stock lost $6 billion in value as institutional investors and private shareholders alike rushed to sell. Stock prices often rise when a company talks tough, but many investors were selling for tax reasons-and others were abandoning a stock that, without the promise of a juicy dividend, seemed no longer worth the ride. Charles Morris, coauthor of the upcoming book “Computer Wars: How the West Can Win in a Post-IBM World,” says, “They have become the GM of the high-tech business.”
That’s strong stuff-and not quite fair. IBM’s problems were far less obvious than GM’s. Increasingly powerful chips let manufacturers put what was once mainframe power on the desktop. It’s hard to imagine any strong company sacrificing a fat-profit-margin business like mainframes to novel (and cheap) PC technology-but that’s exactly what IBM needed to do under the new rules of the industry. If a business runs well, “you probably have to worry about changing it” while profits are strong, explains Hewlett Packard executive Wim Roelandts. “You almost have to kill your children.” IBM didn’t make products that could seriously threaten its beloved mainframes. It compromised promising technologies such as fast RISC chips, which were developed in its own labs but first commercialized by rivals. Big Blue lost control of a market it helped create but never quite understood-and was out of place in the lean, nimble world of “clone” makers. IBM veteran Glenn Henry, now a senior vice president at Dell, explains that “if all you’ve done is herd elephants and you’ve never seen a rabbit, you can tell a fat elephant from a skinny one but you can’t tell that it’s two tons too heavy.”
For all the pain IBM is going through, many analysts say it’s still too little, too late. Some estimated that last week’s Akers announcement was too small by half, while Charles Foundyller, president of the Cambridge, Mass.,-based research firm Daratech, says the company could end up with just 130,000 employees. The armies of sales and support staff for mainframes might be retrained for the consulting business but aren’t needed in the shrinking mainframe market. Aberdeen Group, a Boston-based consulting firm, says half of IBM’s current mainframe customers had plans to cut back or scrap their big iron for networked PCs.
IBM may no longer be able to freely set its own course. Battered institutional investors have targeted IBM to test new Securities and Exchange Commission reforms. California’s pension plan, known as Calpers, has reportedly demanded a meeting with the board, as have managers of New York City’s pension funds. The groups could pressure the board to speed the process and break up IBM into independent companies with stocks that they could trade more easily than their massive blocs of Big Blue. For its part, the board is rumored to be pushing the pace of change now-especially member James Burke, retired chairman of Johnson & Johnson. For now, the CEO appears to be safe, since he’s taking the right steps for the company. “This is not about Akers,” says an executive of a large fund.
Of course, Big Blue can still build a bright future. The company has proved that it can create teams to produce such revolutionary products as the original IBM PC as well as the brilliantly successful AS/400 line of midrange computers. IBM researchers are strong in such technology as voice recognition and “optical computing,” which uses light pulses in place of electrons inside the machine. Sales on its PC line have improved. The best hope for IBM: Taligent, the partnership with Apple to set standards for the next generation of desktop computing. The Apple/IBM partnership uses operating-system software created largely at Apple and hardware built around a powerful RISC chip developed within IBM (but manufactured by Motorola). The move cuts IBM’s strategic dependence on software giant Microsoft and chip maker Intel. The high-tech trio made PCs a hit, but when IBM let the smaller companies set the standards for computing, it gave up its influence over the market. Microsoft and Intel aren’t likely to stand by and be upstaged: each is moving ahead with new generations of its own wares. Microsoft VP Steven Ballmer isn’t worried: “I don’t see a coherent strategy that’s developing around [IBM’s] hardware or the software,” he says.
More than new products, a company in crisis needs a new vision. Daryl White, the chief financial officer of Compaq-which also has undergone a wrenching restructuring-says, “It’s hard to get everyone lined up and marching the same way unless you can tell them where you’re going.” Whatever corporation emerges from the current crisis, it won’t look much like the arrogant IBM of old. It’s up to Big Blue to prove that the company whose motto has long been “Think” is thinking about the future.
