Why? Because IBM’s stock is so cheap. Cheap, that is, compared with smaller high-techies like Microsoft, Oracle or Cisco Systems. These guys trade at roughly $0 to 40 times their per-share earnings. IBM sells for less than a third as much, even after doubling over the past three years to $128. That frustrates IBM’s investors. (Not to mention top managers, who are optioned to the eyeballs.) So much so that chairman Louis Gerstner felt compelled to take up the issue at a recent stock-analysts meeting in Toronto. Without anyone’s even asking, he flatly declared that busting IBM apart is something “we would never, ever want, from a shareholder’s point of view.”
That may be. But there’s a case to be made. Bob Djurdjevic, president of Annex Research in Phoenix and a longstanding critic of the company’s management, offers a typical scenario. “The sum of IBM’s parts is greater than the whole,” he says. As Djurdjevic sees it, IBM has a group of “crown jewels,” operating traits that could be profitably spun off as independent companies. (They include the hardware, software, services and consulting divisions, as shown in the accompanying chart.) If each of these separate companies were then valued in relation to its competitors-an IBM information-services company might be compared, in terms of earnings per share, to a data-processing giant such as Electronic Data Systems–they would together be worth an estimated $115 billion. That’s $50 billion more than IBM’s current market value as a single entity, Djurdjevic figures, translating to a stock price of roughly $180 a share.
These are games with numbers, of course. No one really knows how these hypothetical earnings estimates would hold up in the real world. But that hasn’t stopped other analysts from getting into the act, even if they stop short of actually recommending that IBM break up. John B. Jones Jr. at Salomon Brothers, for instance, “disaggregates” IBM’s various businesses and calculates their hidden worth, in estimated earnings per share. He thinks IBM should be trading around $150 this year, and $190 within two years. (That’s compared with the company’s all-time high of $175, reached in August 1987.) Daniel Mandresh, an analyst at Merrill Lynch, uses a similar calculus to arrive at a “true” stock value of about $150.
Busting up IBM might give shareholders a boost. But would it be good for the company? Those favoring the idea suggest that the company would simply operate more efficiently ff it were split into smaller companies. “It’s not a flaky idea,” says Esther Dyson, editor of an industry newsletter, Release 1.0. Rob Enderle, a consultant at Giga Information Group, agrees. He headed a task force at IBM in the early ’90s that recommended splitting off the company’s $10 billion software group. If IBM’s software developers weren’t so locked into an overall corporate strategy, he argues, they would have gone after new markets more quickly and been faster to dump projects that weren’t selling. His group also noted a tremendous opportunity for cutting costs: some $200 million was spent each year getting headquarters’ approval for. the group’s 10,000-odd software projects.
Lou Gerstner, on the other hand, considers all such talk to be “dumb,” as he put it in Toronto. IBM’s size and breadth, he says, gives the company a leg up in the fastest-growing segment of its business–helping customers integrate technologies and manage large information systems. He’s also aiming to boost efficiency by redirecting resources within the company to the best-performing groups–as he signaled last week in announcing an additional 4,000 job cuts. “Those who advocate breaking up IBM don’t understand either the company or the technology industry,” says a spokesman on his behalf.
Gerstner may be right. Yet if the buzz on the Street demonstrates anything, it’s this: until he gets IBM’s stock up, the talk about carving Big Blue into pieces won’t go away.
Big Blue’s current value is $65 billion. But its assets are worth roughly $115 billion, some analysts say.
Value Based on Avg. 1996 Market Price, in Billions Services $54.1 Large computer systems 38.1 Software 17.1 Osther 5.4 Source: Annex Research
