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November 15, 1993

SO JUST WHAT NAMELESS DREAD MAKES IBM BELIEVE IT NEEDS $10,000m CREDIT LINE?

By CBR Staff Writer

When IBM reported a loss for its third fiscal quarter – the fourth consecutive quarter in the red – there was great sigh of relief. Wall Street analysts had prepared IBM’s shareholders for an even greater deficit than 12 cents a share. A number of observers, taking IBM’s modest loss as a sign the worst was over, said that IBM was on the path to recovery. Some path. Some recovery. IBM has lost $16,000m during the past three years, and piled up debts of $30,000m along the way. And there is more to come. IBM’s chief financial executive, Jerome York, and a select group of his cronies are scurrying around among the big banks trying to raise a new credit line of $10,000m to $12,000m. Not to worry, says York. The money is just insurance. Although high finance sometimes mystifies us, one thing seemed clear. The insurance Mr York seeks is not insurance against profits. It is insurance against another possible staggering loss. We will hazard a guess about this credit line that has more digits than the company’s chairman: It is insurance, all right, and the possible event for which it provides cover is IBM’s loss of shareholders’ class action suits. The direct cause of the litigation is the sharp decline of IBM’s share price in the wake of forecasts by the company’s prior management that turned out to be a bit on the optimistic side, and also not exactly correct. For instance, IBM’s former chairman asserted, in IBM’s annual report to shareholders, that the dividend would not be cut. Well, it wasn’t cut. It was shredded. And IBM cannot now claim that its boss was only kidding around, hoping to cheer up the masses, as it is in a state of financial collapse and consequently has a very weak claim on its sense of humour, which was not very keen even in good times.

Stupid plan

Those looking for the source of IBM’s red ink need glance no farther than the mainframe business. Whatever the technological and competitive factors that might have hurt this vital segment of IBM’s business, no single cause of its malaise is likely to be greater than Big Blue’s stupid plan simultaneously to eliminate standard prices, threaten the livelihoods of its employees and pay its sales reps on the basis of sales volume rather than the profits they might generate. IBM’s sales plan, in a nutshell, was a scheme by which any rational sales person would fight for customers’ discounts rather than take the chance of failing to sell big iron. IBM’s top customers, along the way, regularly attended meetings sponsored by professional organisations and consultancies at which they could conspire to squeeze IBM all the harder. And everyone is reading publications (like this one) that publish IBM’s supposedly secret pricing, thereby pouring gasoline on the fire. There is nothing like a suicidal corporation to bring out an encouraging crowd.

– Hesh Wiener

From the November 1993 edition of Infoperspectives International, published by Technology News Ltd, 110 Gloucester Avenue, NW1 8AJ. Copyright (C) 1993 Technology News Ltd. All rights reserved.

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