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Sunday, December 20, 1992 - Page updated at 12:00 AM

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IBM: Mainframe Giant Is Shrinking

Knight-Ridder Financial News

NEW YORK - In the draconian restructuring moves announced last week by International Business Machines Corp., company executives made it clear for the first time that IBM's days as computer mainframe giant are officially numbered.

Indeed, Tuesday marked both the beginning of the end, and the beginning of a new era, for the world's largest computer company, analysts said.

By planning another 25,000 job cuts in 1993 - most of which will be in IBM's mainframe businesses - IBM is clearly downsizing, and not just embarking on yet another cost-cutting venture, analysts said.

Analysts speculated that IBM will spin off parts of its mainframe business after John Akers, chairman and chief executive officer, told analysts that "other forms of ownership" are being considered for IBM's mainframe storage business ADSTAR, high-end printers unit Pennant Systems and Personal Computer Co.

Meanwhile, revelations from IBM's finance chief Frank Metz that the dividend isn't guaranteed - and that the company won't reach its previously announced return on equity target - shattered investors' confidence.

But, analysts said, a new IBM that phases out its mainframe division - which accounts for 65 percent of its business and that could take as long as 20 years to get rid of - will still be an attractive investment, even though its earnings power will never be the same.

"People will be very interested in investing" in the rest of IBM's business," said Curt Rohrman, analyst at First Boston. `"BM has a tremendous personal computer business, tremendous work stations and these areas have the right cost structure. It has the best minicomputer business around and a strong services business."

But he added that "people have lost confidence in the management team. The dividend was the last straw of credibility this company had."

IBM said it is taking a $6 billion restructuring charge in the fourth quarter and will report break-even operating results in that period.

Analysts subsequently slashed their earnings forecasts for 1992 and 1993. The consensus on 1992 earnings per share, according to First Call Corp., fell to $3.57 from $3.92, excluding restructuring charges to be taken in the third and fourth quarters. Estimates range from $2.45 to $4.45.

First Boston's Rohrman said it's doubtful IBM will earn more than $3 a share in 1993. He sees 1992 earnings at $2.50 a share.

IBM's 25,000 job cuts will bring its worldwide head count to about 275,000 in 1993. By December's end, IBM will employ 300,000 people, down 44,000 for the year. Akers told analysts that he could not predict whether more cuts would be enforced.

Analysts said it was impossible to determine the ideal size of IBM because the key question is how long it will take to phase out its mainframe business.

"There's no ideal size," Rohrman said. IBM is "constantly adjusting its cost structure to meet the mainframe decline.

"It's more a question of whether the mainframe business takes five years or 20 years to die. It will take that amount of time to reduce the cost structure."

Copyright (c) 1992 Seattle Times Company, All Rights Reserved.

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