Gerstner regime faces the acid test this quarter
During the next three months, IBM will be in the spotlight. It is the fourth quarter, and not just any fourth quarter. This is the Gerstner regime’s big one. For IBM’s new management, the honeymoon is over. If the company’s leaders haven’t learned how to manage IBM by now, the chances are slim to none they ever will. But whether they run it or ruin it, IBM’s top brass certainly has got the company moving. Mainframes are going to be CMOS. The AS/400 will become a PowerPC machine. The RS/6000 will be a fondly regarded also-ran in the Unix race. The mainstream personal computer business will remain Intel territory for the time being, while Apple (using IBM PowerPC chips) will continue to be the desktop computing world’s voice of creative dissent. In storage, small disks with larger brains are sweeping away larger and less clever types of files. Communications technology is stumbling toward the techniques made popular by the Open Systems movement. Data archives are soon to be blessed with new technology that will increase the capacity per cubic foot of media by a least a factor of 10. The only catch is that much of what IBM has promised it cannot yet deliver.
Sorely needs
Those marvellous new mainframes don’t have software. The new IBM mid-range machines will not be delivered until the first half of next year and they, too, must have a new operating system. Compaq is probably going to hold its lead on the desktop, in part because IBM seems to have forgotten it needs applications software for its PowerPC workstations. Those new disk subsystems, based on drive technology that the disk industry recognises as the best, are only half available; IBM remains unable to make adequate volumes of the 4Gb drives it sorely needs. There are some persistent kinks and the occasional serious gap in IBM’s line of data communications products. And the supertape and its cousins in the optical storage world are unfortunately, still promises rather than products. So even though there are excellent current IBM products in every category, from 9021 mainframes on down, customers’ appetites during this critical quarter may not be as keen as IBM would like. Prospective buyers worry, with justification, that the items they acquire now could be an embarrassment by this time next year. At the very least, they will seem bulky and expensive. The obvious response from IBM would be to cut prices and promise easy upgrades. But IBM is understandably reluctant to act precipitously and thereby cut profits. We think IBM will hold out until November and then, facing a shortfall in revenue, adopt more aggressive measures. If enough customers act as we expect, their theory will become self-fulfilling: users will get better value, and IBM will show whether it remembers how to make money.
Comdisco settlement holds out hope that litigation will take a back seat at the new IBM
The legal battles between IBM and Comdisco are now just another address in Memory Lane. The world’s largest computer maker and the world’s largest computer lessor agreed, on August 25, that their dispute was merely a silly misunderstanding. IBM and Comdisco agreed that the latter party hadn’t done anything wrong when it sold subleased hardware or overleased computer equipment or remanufactured IBM memory boards or traded in such boards made by others. And just to show it was on the up and up, Comdisco gave IBM $70m, every penny made the old fashioned way, using the very methods familiar to IBM and IBM Credit. Comdisco also agreed never to do again any of the things it didn’t do in the first place. In addition to the direct costs, which consist of $50m in cash and $20m in 6% convertible bonds, Comdisco also paid its lawyers a little money for their able assistance during the past couple of years. The modest fees of Jenner & Block (formerly one of IBM’s law firms in the Chicago area and still a tenant in Chicago’s IBM Tower), plus local talent in Delaware, plus other costs came to no more than $30m by some accounts, $35m by other accounts and $4
0m by still other reckoning. The precise number of tons of money collected by IBM’s lawyers – Cravath, Swaine & Moore, of New York, plus local firms – was not revealed. Insiders claim that Cravath cost IBM less than Jenner cost Comdisco. Outsiders almost universally believe that IBM’s total ticket (not all of it the Cravath bill) may have doubled Comdisco’s. Leasing industry wags maintain that the $70m settlement had to be more than IBM spent on its side of the case, but only by at least $1. We think that nobody actually knows the answer, not even IBM, not even Cravath. IBM is embroiled in a number of overlapping cases and it might be in IBM’s interest to attribute much of the cost to the remaining litigation, particularly the memory suit against Phoenix International in England, because British courts often award legal costs while American courts usually do not.
The Litigation Trust Company
One reason the expenditures by both sides were so high is that each team of lawyers felt compelled to support their arguments with legal evidence provided by experts. We can’t recall who the experts were, let alone what they said about leasing practices, memory technology or whatever else they were willing to discuss in return for their fees. We do believe, however, that the sums charged by various experts for the benefits of their certain knowledge and keen judgement were modest, probably somewhat less than they were paid for the prior hundred years of their careers. The small fees serve as testimony to the absolute incorruptibility of experts. Who but a qualified authority telling the truth, the whole truth and nothing but the truth would deserve such a princely fee. The record, now sealed, shows that these experts disagreed on a few points, of course, but this does not mean any of them was wrong. It means they were all wrong. Comdisco can afford its costs of $100m plus, but not without some pain. But neither could it afford a lawsuit that could have continued for years with direct costs of $10m to $15m a year or the uncertainties associated with any litigation. So when the settlement was announced, Comdisco’s stock rose by about $3 a share. There are more than 37m shares outstanding, which makes the increase in Comdisco’s market value almost exactly the same as the total cost of the litigation and its settlement. IBM stock was unaffected by the settlement because neither the lawsuit or any possible outcome was seen as a significant influence on the company’s situation. In addition to the direct settlement, IBM and Comdisco agreed to work together in two ways. First, the companies’ disaster recovery services units will collaborate by providing mutual back-up. This will enable each (or both) to provide coverage to giant financial institutions that need more warm iron than either IBM or Comdisco was comfortable supporting. On another front, Comdisco is now likely to be qualified to remarket IBM mid-range systems – AS/400s and RS/6000s. This may be more important in France than at home, at least in the near term. In France, Comdisco’s recent acquisition of Promodata makes it the country’s (and arguably Europe’s) largest independent AS/400 lessor and trader. IBM’s legal battles are far from over. It is still struggling to have the 1956 consent decree rescinded and its multinational suite of memory suits against Phoenix International could drag on for years. It is hard to see a clear business case for either action. One story about the settlement that highlights the difference between IBM’s current management and its last generation of leaders. Sources in the computer industry say that the IBM-Comdisco deal was achieved by locking all the lawyers out until a deal was struck. This settlement strategy may set a dangerous precedent and it could lead to a terrible crisis in the law racket. If things get bad enough, the government might have to step in and set up an organisation – the Litigation Trust Company? – to bail out a bankrupt bar. – Hesh Wiener
From the October 1994 edition of Infoperspectives International, published by Technolo
gy News Ltd, 110 Gloucester Avenue, London NW1 8JA, phone 0171 483 2681, fax 0171 483 4541. Copyright (C) 1994 Technology News Ltd.
