Breaking Up May Be Hard To Do, But IBM Urged To Move On It
Los Angeles Times
With the benefit of hindsight, it's 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 during the past two years.
Far more difficult, however, is trying to determine what Chairman John Akers - or his replacement if IBM's whopping losses cost him his job - should do next. The most obvious steps - cutting tens of thousands of workers and closing factories - have already been taken. But cost-cutting measures alone won't be enough to turn around the company.
A growing number of analysts are saying the only logical alternative 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," says Charles Biderman, editor the 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 simply cannot afford to lose months, or even weeks, while product and marketing decisions wend their way through multiple 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 with the Compaqs and Dells of the world.
Akers has recognized the logic behind a breakup. In fact, the centerpiece of his long-term strategy is an effort aimed at giving the company's 13 units more autonomy.
But a year after the strategy was announced, the company still hasn't begun breaking out financial results for the individual units. And managers still have little incentive to do anything that might damage other pieces of IBM.
The decentralization effort "is nothing more then verbiage," says Bob Djurdjevic, president of Annex Research in Phoenix. "They haven't done any of the structural things needed to break it apart."
Djurdjevic says a financial analysis of the pieces of IBM 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 to shareholders than all of IBM is today.
And some analysts argue that a breakup would destroy whatever competitive advantages IBM might hope to gain by virtue of its broad technology portfolio.
For similar reasons, Richard Shaffer, publisher of the PC Letter, believes that the arguments for a breakup are specious. "This a great bandwagon that is being pushed by IBM's competitors," he says. "If I were Sun (Microsystems, a competitor in the workstation market), I would love to see IBM broken up."
Proponents of a split-up point out that IBM is the only company in the computer industry that tries to compete in every aspect of the business. And IBM simply can't be competent in everything, they add.
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