If IBM hopes to compete, must it break itself up?

January 25, 1993|By Jonathan Weber | Jonathan Weber,Los Angeles Times

With the benefit of hindsight, it is easy to see the many strategic errors that have transformed International Business Machines Corp. from America's most successful and admired company into a struggling behemoth that has lost $7.8 billion in the past two years.

Far more difficult, however, is trying to determine what IBM's chairman, John F. Akers -- or his replacement, if IBM's whopping losses cost him his job -- should do next. The most obvious steps -- to cut tens of thousands of workers and close factories -- have already been taken. But cost-cutting alone will not be enough to turn around the company.

A growing number of analysts are saying that the logical next move is an outright breakup of the company, in which many of IBM's 13 business units would be sold or spun off to shareholders.

"They are going to be split up one way or another, and it's either going to be by design or by force," said Charles Biderman, editor of Market Trim Tabs newsletter. "The value of the pieces should be well over $100 a share, or double what it is today."

The case for a breakup is straightforward: IBM has lots of good technology and lots of smart people. But its ability to compete in the lightning-fast computer business is crippled by bureaucratic decision-making and the unwillingness of different IBM units to compete with one another.

With thousands of small, highly focused competitors, IBM cannot afford to lose time as its product and marketing decisions wend their way through layers of management. And as long as IBM's personal computer unit, for example, cannot target IBM mainframe customers who might be considering switching to a network of personal computers, it will be unable to compete effectively with the Compaqs and Dells of the world.

Mr. Akers has recognized the logic behind a breakup. The centerpiece of his long-term strategy is an effort to give the company's 13 units more autonomy. He speaks of IBM's becoming a "federation of companies" with discrete profit-and-loss responsibilities and, perhaps, outside shareholders.

But a year after the strategy was announced, the company still has not begun breaking out financial results for the individual units. Managers still have little incentive to do anything that might damage other pieces of IBM; careers are still bound by the fate of IBM as a whole.

The decentralization effort "is nothing more than verbiage," said Bob Djurdjevic, president of Annex Research in Phoenix. "They haven't done any of the structural things needed to break it apart."

An analysis of the various pieces of IBM, Mr. Djurdjevic said, shows that they would be far more valuable as separate entities. After estimating revenue and profit from five separate lines of business and assigning them a stock-market value based on what comparable rival companies are worth, he concludes that the profitable mainframe computer business alone would be worth more than all of IBM is today.

If the special charges taken by IBM in 1992 are excluded, he said, the mainframe business and associated software and services would have registered $2.64 billion in profits, on sales of billion -- and would have had a market value of nearly $53 billion, compared with $27 billion for the whole company.

The minicomputer business would have earned $1 billion, on sales of $12.8 billion, and had a market value of $14.1 billion. The disk drives operation would have made $299 million, on sales of $7.6 billion, and had a market value of $3.6 billion.

Printers and personal computers, on the other hand, were big losers, with the personal systems group recording a $500 million loss, on sales of $9.1 billion.

Some of Mr. Djurdjevic's assumptions might be overly optimistic: The mainframe business, for example, is valued according to the share prices of mainframe companies in the 1980s, before it became apparent how much damage smaller computers would do to that business.

And some analysts argue that a breakup would destroy whatever competitive advantages IBM might gain by virtue of its broad technology portfolio.

"A lot of the long-term value is that, someday, the personal computer division may have access to [superior] technology from the semiconductor division," said John Jones, an analyst with Salomon Bros. "There are lots of interrelationships from a technology standpoint. Do you want to just be a PC clone company?"

Mr. Jones said there are a few IBM units, notably the printer division, that the company might be better off selling. Beyond that, he said, he believes that Mr. Akers' "federation" approach is on target, although the benefits will not become clear until the global economy improves.

For similar reasons, Richard Shaffer, publisher of the PC Letter, rejects the arguments for a breakup. "This a great bandwagon that is being pushed by IBM's competitors," he said. "If I were Sun [Microsystems, a competitor in the workstation market], I would love to see IBM broken up."

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