InformationWeek

Should IBM Be Split Up?

Yes! It could create nimble, focused units that would work better with IS managers

By Bob Djurdjevi'c
Issue date: March 25, 1996

The sum of the parts sometimes can be greater than the whole company. Evidently AT&T chairman Bob Allen thought so when he announced the voluntary break-up of the telecom giant last September.

Just two years ago, IBM chairman and CEO Lou Gerstner reversed his predecessor John Akers' plan to break IBM into units focused on its various hardware platforms.

Who's right-Allen or Gerstner? Could the logic behind the AT&T breakup apply to IBM?

It could-but not the way Akers envisioned it. The upshot of a well-planned and executed IBM breakup could be a $42 billion bonanza for shareholders-and a set of more nimble, focused companies that IS managers would have an easier time doing business with.

Here's why: The four most profitable IBM businesses-global services, software, S/390, and AS/400-contributed a combined 66% of the company's total 1995 net profit. RS/
6000 added another 8%.

As separate companies, with shares priced in line with leading rivals such as Amdahl, EDS, Hewlett-Packard, and Microsoft, these "crown jewels" would together be worth more than $102 billion-$42 billion more than IBM's total value based on its average 1996 share price.

Stock in a services company including IBM's highly successful Integrated Systems Solutions Corp. (ISSC) outsourcing unit, for instance, could trade above rival EDS' average 1996 price-earnings rat io of about 28.5-almost double IBM's average P/E of 15.

So how should Gerstner break up IBM?

Sell the PC division and other low-margin hardware operations, such as OEM or Storage Systems.
Spin off ISSC with the rest of IBM's services business into a separate company.
Consolidate high-margin product units-S/390, AS/400, RS/6000-into one company.
Evaluate spinning off some software businesses, such as Lotus or systems management.
Aggressively market the concept of "smaller is better" to Wall Street.
Increase dividends as the company's value rises.

What would it take for Gerst-ner to make this plan reality?

Two things: courage and humility. Courage, because Gerstner would have to act more boldly than any IBM chairman since Tom Watson Jr. and the S/360 project of the 1960s. Humility, because Gerstner would have to give up empire building and concentrate on creating wealth for shareholders-including himself, of course.

Does he ha ve what it takes? Based on his recent performance, I'd put the odds at better than 50/50. This is a gamble Gerstner could win for IBM, customers and investors.

Bob Djurdjevi'c is president of Annex Research, a consulting firm in Phoenix.

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