How IBM Was Left Behind

Mainframe computers were its cash cow. Then the industry changed, and Big Blue was just the leader of an obsolete market. Can it ever recover?

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When it comes to dominating an industry, few companies have done so with the overpowering force of International Business Machines. From gigantic mainframes and tiny laptops to semiconductors and software, IBM ruthlessly called the shots for the entire industry after the computer became a commercial item about 40 years ago. So tight was IBM's market grip that it was practically impossible for any computer company to do business without being tied in some way to the Big Blue colossus.

How the mighty have fallen. While most of the industry is enjoying a renaissance, the world's largest computer company is being overwhelmed by an array of problems in one market after another. Its mainframe business, the core of the company, is being undermined by microchip miracles that make today's low-cost desktops as powerful as yesterday's closetfuls. Its lead in personal computers has evaporated. Its supremacy in computer chips is a mere memory. In software, upstart companies that didn't exist a little more than a decade ago are running rings around the 78-year-old behemoth. And even worse, IBM has been bogged down by endless rounds of painful restructurings and cutbacks. "IBM is no longer the monolithic monster that strikes fear in the hearts of competitors," says Ulric Weil, a leading computer consultant. "It has proved to be quite mortal after all."

! At a time when other computer companies, including Sun Microsystems and Compaq, have been reporting hefty profit increases and rolling out innovative products, IBM last week was announcing its most traumatic cutbacks to date. In the fifth major restructuring in the past seven years, it plans to shed more unprofitable and ill-fitting assets and slash its work force next year more than 8%, or an additional 25,000 employees. Only a year ago, IBM reorganized its operations into 13 semiautonomous units, called "Baby Blues." The latest round of cuts will include the first layoffs in the company's history and will lead to a $6 billion write-off for the fourth quarter. IBM is expected to post a net loss of about $4.8 billion for the year -- the second largest in American corporate history.

IBM also announced that it would pare its spending on research and development $1 billion, or 17%, a move that prompted President-elect Bill Clinton to comment while leading a two-day economic conference in Little Rock. Though he conceded that IBM's cuts reflect the irresistible pressures facing U.S. manufacturers, he expressed concern about IBM's decision to slash investment in research and development. That kind of expenditure, said Clinton, is "the exact thing we don't want them to be cutting."

The bad news echoed loudest on Wall Street, where IBM stock has been transformed from a darling into an ugly duckling in recent years. IBM shares went into a free fall after chief executive John Akers warned that the company may have to cut its rich yearly dividend of $4.84 a share as a result of the restructuring. "The reality of the environment we find ourselves in makes us less sure we'll be able to maintain that dividend," he said. "We must be frank with ourselves and honest with our constituents, including our shareholders." The company's stock plummeted 11 points last week to hit its lowest level in 11 years, wiping out $6.3 billion in shareholders' equity.

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