IBM Is Planning $2 Billion Charge To Slash Jobs

IBM Is Planning $2 Billion Charge To Slash Jobs

Second-Quarter Write-Off To Cover 50,000 People, Twice Earlier Forecast

By Michael W. Miller
The Wall Street Journal

July 2, 1993

International Business Machines Corp., still mired in its worst slump ever, is preparing to announce this month a massive new charge in the range of $2 billion to pay for slashing its work force by about 50,000 people this year, twice as many as it had predicted.

IBM will need the new charge because its current round of buyouts and layoffs greatly exceeds its previous estimate of 25,000 employees. The colossal $11.6 billion in charges IBM took last year included provisions for cutting 25,000 employees in 1993, but IBM later warned that that estimate would be low.

An IBM spokesman wouldn't comment on the cuts. But industry officials confirmed the details of the new charge, which IBM is expected to announce with its second-quarter results on July 27. Officials warned that the exact dollar and employee numbers could still fluctuate, as IBM compiles the results of a big job-cutting program that ended June 30 in many of its locations.

The latest cuts will shrink IBM's head count to about 250,000, down from a 1985 peak of 405,000. Depending on the tax treatment, it also could shrink IBM's book value to about $44 a share. IBM's battered stock has been steadily following its book value downward. It closed yesterday at $49.25, down 12.5 cents, and far below a 1987 peak of $175, in New York Stock Exchange composite trading.

Moreover, IBM's new chairman, Louis V. Gerstner, is widely expected to shed more people and assets later this year. The current program of cuts was launched before Mr. Gerstner arrived at IBM in April.

In a May prospectus, IBM warned that Mr. Gerstner had asked his top managers to submit their predictions for "additional personnel and asset reductions." It said IBM wouldn't finish analyzing those numbers until the second half of the year, and added that "both the charges and the resulting cash requirements could continue to be significant."

Mr. Gerstner's first moves as chairman included hiring two top lieutenants with special expertise in hacking away bloated corporate overhead: Jerome York, former chief financial officer of Chrysler Corp., and Gerald Czarnecki, who presided over big cutbacks at Honolulu's HonFed Bank. Both are now reviewing the sprawling IBM empire in close consultation with Mr. Gerstner.

Even amid plunging profit margins for its chief business, mainframe computers, IBM can afford the big new charge. In June, it raised $3 billion from a package of debt and preferred stock.

Wall Street analysts also widely expect the IBM board to cut its dividend again, possibly as soon as its next meeting on July 27. The consensus prediction: a cut to $1 a share from the current $2.16 a share. With about 570 million shares outstanding, that cut would save IBM about $660 million a year.

IBM cut its dividend from $4.84 a share last year. In the May prospectus, it pointedly warned another cut might come, saying it will "continue to review" cash requirements, "including the level of future dividends."

The latest personnel cuts are the most painful in IBM's history, including its first layoffs in half a century. IBM long prided itself on its tradition of "full employment," taking elaborate pains to transfer employees hit by reorganizations and factory shutdowns.

IBM also gave many employees a powerful incentive to quit voluntarily this year, warning that its U.S. benefit package would shrink drastically for anyone who left after June 30. Many employees overseas have until Dec. 31 to take the current benefits.

In general, it costs IBM an average of roughly $100,000 for each departing employee -- more for some European employees, less for lower-paid factory workers. The coming charge is currently expected to be slightly less than $2 billion pretax. One reason: It includes a significant number of workers from IBM's massive complex of mainframe factories in New York's Hudson River valley.

Without the charge, analysts had been expecting IBM to post a second-quarter loss of about $200 million, or 35 cents a share, and a full-year loss of about $285 million, or 50 cents a share. In the 1992 second quarter, IBM had net income of $734 million, or $1.29 a share. For all of 1992, it had a loss of $4.97 billion, or $8.70 a share, including the huge charges.

Credit: Staff Reporter of The Wall Street Journal