NEW YORK -- Only four months after taking over a hemorrhaging IBM, Chairman Louis V. Gerstner Jr. said yesterday that the company was taking a staggering $8 billion quarterly loss to pay for eliminating 85,000 jobs by the end of next year -- drastic action that Mr. Gerstner said should put the world's biggest computer company on the path to recovery.
Although brutal, analysts and computer industry observers said, yesterday's announcement could indeed mark the low point for International Business Machines Corp., which has been plagued a bloated payroll from the 1980s and diminishing sales of its flagship product, mainframe computers. If the economy stays relatively stable here and abroad, IBM may be able to return to profitability next year, analysts say.
The gargantuan loss for the three months that ended June 30 stems from a one-time $8.9 billion charge to cut 50,000 jobs this year -- 25,000 more than expected when the original plan was announced in January -- and 35,000 additional jobs over the coming 18 months. The cuts will shrink the computer giant to 225,000 employees by the end of 1994, nearly half its peak size of 406,000 in 1985, as it struggles to retain a leading role in the fiercely competitive market for computers and technology services.
In addition, the company cut its quarterly dividend to 25 cents from 54 cents, a blow to the company's 700,000 shareholders but a move that will save the company about $500 million a year.
Mr. Gerstner's decision to absorb the huge restructuring cost in just one quarter was one of his biggest so far.
"We've got to try to get behind us this Chinese water torture we've been going through quarter after quarter, year after year. We've got to get our problems behind us," Mr. Gerstner said.
Mr. Gerstner said the company would not hesitate to cut further, but said he assumes the current round of cuts will be the last. Describing employee morale as "bad," Mr. Gerstner said the company needed stability and profitability for it to address longer-term problems.
IBM's revenues for the quarter were $15.5 billion, a 15 percent drop from a year ago. Six-month revenues were $28.6 billion, down 5.6 percent over a year ago. The loss worked out to be $14.10 a share, vs. earnings of $1.29 a share for the same period last year.
Speaking at his first press conference since taking over in March from ousted IBM boss John F. Akers, the former head of American Express Co. and RJR Nabisco Corp. displayed a newfound knowledge of the computer business that he candidly admitted lacking a few months ago. He also impressed many analysts with his blunt answers and boundless self-confidence.
"The last thing IBM needs right now is a vision. What IBM needs now is a series of tough-minded, market-driven decisions. The first frame of any vision has to be profitability," Mr. Gerstner said.
Mr. Gerstner said half the one-time charge of $8.9 billion -- $8 billion after taxes -- would be used to pay for the new round of 35,000 layoffs. About $2 billion would pay for the additional 25,000 people leaving the company this year and the rest to close offices and factories. The cuts would hit overseas operations the hardest, Mr. Gerstner said, adding that IBM does not yet know where the reductions will be made.
'Clear the decks'
IBM employs about 10,000 in Maryland, including 400 in Baltimore.
"It looks like he is trying to clear the decks. If the general economic situation remains as it is now, it looks like this might be the last major cut," said George K. Lynch, a corporate bond analyst with Salomon Brothers.
Another analyst, Prudential Securities Inc.'s Marianne Wolk, said IBM should be profitable next year and could make $3 to $4 a share, or about $2 billion.
Other analysts were not so sure, with one saying that Mr. Gerstner may have underestimated the entrepreneurial zeal that some of the newly decentralized IBM divisions have for cost-cutting. Despite a $7.2 billion charge taken in January to cut 25,000 employees and the current round of cuts, about 5,000 or so employees could leave the company each quarter over the coming years, said one analyst, who did not want to be identified.
Robert Sobel, a business historian at Hofstra University on Long Island and author of two books on IBM, agreed. "The other shoe dropped, but there probably are other shoes that still have to be dropped," he said.
Mr. Gerstner's decision to cut the dividend was also controversial -- not for reducing it by half but for not eliminating it. While some analysts thought the cut was enough, others said Big Blue could ill afford to hand out any money to shareholders.
Reflecting concern about the company's finances, Standard & Poor's Corp., a bond rating agency, downgraded IBM's debt a fraction, while another agency said it was considering a similar step.
Despite the second highest single-quarter loss for a U.S. corporation, analysts and investors found some positive developments, which helped lift the stock $3.25 a share to $45.625 in heavy trading on the New York Stock Exchange. On Monday, the stock at one point sank to $41.125, an 18-year low.
The $8 billion loss for the quarter, for example, masked the fact that the company's operating loss was $40 million, about half what Wall Street analysts had predicted, while a decline in sales in the key mainframe business slowed over the first quarter. In addition, several important divisions, such as personal computers and services, showed strong profits, with the service division's profits up 26.6 percent.
"Positive signals are out there," Mr. Gerstner said, "but not enough yet for a trend."
Others agreed, noting that IBM had to continue its move away from developing unique hardware to being a service company that sells a commodity -- computers. Because most manufacturers now can make what the other produces, competition is between price and service, with no company having a lock on the market as IBM once had.
"They've got to become a service company that can give companies solutions, not a manufacturer of high horsepower mainframes," said Frank Castle of Feeley & Willcox.
Mr. Gerstner said the company would continue to make its technology more accessible to other computers and has started projects in interactive media.
Analysts agree that IBM has moved more quickly than some competitors, such as Dell and Apple, but still runs some divisions as though they will dominate the market eternally.
IBM's memory and software divisions, for example, will soon face the sort of intense competition felt by the hardware divisions, said Michael Geran, an analyst with Pershing Inc.