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November 10, 1993

WHY DEPARTURE OF HARRY KAVETAS MAY SIGNAL ALL CHANGE AT IBM CREDIT CORP

By CBR Staff Writer

The head of IBM Credit Corp is leaving on December 31. And the captive lessor’s top lawyer has been transferred to Paris. IBM said it will put its vice-president for finance in charge of IBM Credit. And IBM has moved an IBM Credit staff attorney up to fill the top legal job in the leasing group. IBM issued a press release on October 4 stating that Harry Kavetas, president of IBM Credit, is retiring at age 55 after 32 years with IBM. Stories in the next day’s newspapers quoted Kavetas saying that he had wanted to become chief financial officer of IBM, a job given to Jerome York, who was brought in from Chrysler Corp by chairman Louis Gerstner. Frustrated by the York appointment, Kavetas quit. However, the coincidental reassignment of the lawyer who sat at Kavetas’ right hand and other events at IBM Credit Corp have led to speculation that the real story is quite a bit more complicated than IBM’s press release. Richard McDonough III has been made general counsel for IBM Europe, in Paris, while John Shay Jr, assistant counsel at IBM Credit was promoted to general counsel.

Differ

While McDonough’s transfer to Paris may be viewed as a move upward, it also removes him from the vicinity of IBM’s world headquarters in Armonk, New York. Although IBM Credit became the largest entity in computer leasing under Kavetas, it also has been the most visibly acrimonious division of IBM. IBM Credit instigated and continues to pursue a complex and expensive lawsuit against Comdisco stemming from Comdisco’s treatment of equipment that it subleased from IBM Credit Corp. That lawsuit led to others surrounding the sale of high-priced mainframe memory boards made of IBM components removed from identical but less capacious and less costly – IBM memory boards. Again, Comdisco, IBM Credit’s arch-rival, is the principal defendant in litigation instituted by IBM. (Comdisco is not the only company IBM battled over rebuilt memory boards. IBM has a lawsuit against Phoenix International Computers of Great Britain, and it obtained unspecified compensation for alleged damages from two large American lessors). Nor is IBM Credit’s litigious character the only matter about which IBM’s new management might differ with Harry Kavetas. Some aspects of IBM Credit’s financial statements have been criticised by Wall Street financial analysts and other outsiders have repeatedly questioned whether IBM Credit is sufficiently cautious about the way it has valued its lease portfolio. Another potential matter that could yet affect IBM stems from IBM Credit’s sale of its portfolio of IBM employee home mortgages. During the second quarter of 1991, IBM Credit Corp sold its employee mortgage portfolio for $586.6m. The company characterised the market conditions for the sale of this asset as favourable. And, with a huge wave of lay-offs in the offing, it is not clear that IBM Credit’s sale was completed at a most propitious moment. IBM Credit has not yet been taken to task – or to court – over its sale of the obligations of employees it would soon put out of work, and it may never be. However, the wave of mortgage defaults by former IBMers is only now beginning to build, and with it the risks faced by investors who acquired the obligations. IBM’s management during 1991 was led by John Akers, since forced out; Kavetas was one of IBM’s corporate vice-presidents at the time. It was in the 1991 annual report that IBM published statements by Akers under the heading Questions and Answers.

By Hesh Wiener

The first question was, Is the dividend [$1.21 per share per quarter at the time] in any danger of being cut? Since then, IBM has cut its quarterly dividend to $0.25 a share. One hint that IBM’s new management was not fully satisfied with Harry Kavetas appeared on September 13, when IBM’s chairman issued a memorandum describing revisions of the company’s top management. Where IBM had formerly had a group called the Corporate Management Board, on which Kavetas had sat since 1992, it now would have a very powerful Corporate Executive Committee and a less immediately influen

tial Worldwide Management Council. Kavetas was not part of either group. Rather, he was told to report to chief financial officer York, a position that reduced the access to IBM’s top executive that Kavetas had enjoyed during the Akers regime. It is no wonder that outsiders speculated that Kavetas left not, as stated, because he was passed up for a promotion but instead because he had been in fact demoted. Kavetas may have been in part a victim of his own success. He built IBM Credit Corp into a huge enterprise with immense control over the American base of leased mainframes and peripherals. However, the prices of large systems have plummeted far more rapidly than IBM – or, we believe, IBM Credit – had reckoned. The result may not be the large shortfall in value some analysts believe IBM Credit will soon recognise – although a write-off this year would be viewed as a problem left behind by Kavetas rather than a matter for which his successor must be held accountable. The most severe side effect of IBM Credit’s rise is the impact the captive lessor’s tough policies will have on customers and on IBM’s sales force. With mainframe processor and disk technologies about to undergo a substantial transition, IBM might well be better off if its older systems were owned by others rather than by its own leasing company. If Kavetas had set out to vanquish Comdisco armed with the knowledge now in his possession, he might have let the independent lessor win the customer base on the eve of a crash in equipment prices. So, ironically, although IBM Credit has until now appeared to be Comdisco’s nemesis, it may turn out in the long run to be its rival’s best friend. The change in leadership at IBM Credit may pave the way to a settlement of some of the litigation with Comdisco. However, it is doubtful that IBM Credit could assume a dramatically different posture without the approval of IBM’s chief counsel, Donato Evangelista. So outsiders, particularly Comdisco, are watching IBM closely for a sign that Evangelista, 61, will retire… and hoping he will be succeeded by somebody whose first mission will be to conduct a complete and critical review of all IBM’s ongoing litigation. Whether or not IBM Credit eases its way out of some legal conflicts, the imminent departure of Kavetas will undoubtedly lead to a series of changes with the captive lessor.

Shorter horizon

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The new president of IBM Credit, James Forese, will be in charge for only a brief period. Forese is 57, two years older than Kavetas and nine years older than Kavetas was when Kavetas was put in charge of IBM Credit. Thus Forese appears to be in a transitional role that will permit IBM’s management to restructure IBM Credit and then install a new regime that is not obligated to the policies of the past… nor chained to IBM Credit’s current portfolio. The duration of computer leases is rarely more than five years, making for an average remaining term of two to three years. IBM Credit’s other big business, the financing of dealer inventories, is a business with an even shorter horizon. Leasing customers should not be surprised if IBM Credit temporarily becomes much less interested in adding to its portfolio and instead lets its lease base run down to throw off some of the cash that IBM so desperately needs. Should this occur, lease rates for new mainframes may rise substantially… unless the independent lessors can find some very brave investors.

Copyright (C) 1993 Technology News of America Co Inc All rights reserved.

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