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IBM

FOUNDED: 1910
ALSO KNOWN AS: International Business Machines Corporation

Contact Information:

HEADQUARTERS: New Orchard Rd.
Armonk, NY 10504
PHONE: (914)499-1900
TOLL FREE: (800)426-3333
URL: http://www.ibm.com

OVERVIEW

IBM is the world's largest computer company, with annual sales rapidly approaching 12 figures, about 60 percent of which comes from outside of the United States. In addition to manufacturing hardware and software, IBM has diversified into the areas of Internet service and computer consulting—in 1997 alone, 15,000 new employees joined IBM's services arms. The early 1990s were a time of crisis at IBM, but after a major revamping that began in 1993 and included some downsizing and a reevaluation of the company's strong points and mission, IBM managed to get back into the driver's seat and into the fast lane.

In 1997 the company was awarded the most U.S. patents for the fifth straight year—1,724, 300 more than the second-place applicant and almost 500 more than it received in 1996. Among the most significant was its breakthrough in using copper wiring in place of aluminum in chips, which greatly boosts both the speed and capacity of semiconductors. IBM often licenses its proprietary technology to communications and computer companies, a venture that earns it more than __BODY__ billion per year.

COMPANY FINANCES

From a financial standpoint, 1997 was a record year for IBM, and a crucial one for nurturing the company's improving health. Revenues for 1997 reached $78.5 billion, with $19.3 billion representing the company's services businesses. Net earnings were $6.1 billion, up from $5.9 billion in 1996. After the effects of foreign currency fluctuation, earnings improved by 8 percent. During the year, the company invested $5.5 billion in research and development, $300 million more than in 1996, and laid plans for a $700-million microchip development facility that will utilize the newly patented copper technology.

Stockholders' equity in 1997 measured almost $20 billion, and earnings per share were $6.18, up from 1996 earning of $5.53. Since 1996, the quarterly dividend has increased by 76 percent. In April 1997 directors raised the amount by 14 percent and, in April 1998 they increased it by another 10 percent, along with approval to step up the stock-buyback plan by $3.5 billion. Between 1995 and 1998, the company bought back about $20-billion worth of its common stock. At the close of 1997, there were 623,537 holders of common stock, which split two-for-one in the second quarter. IBM's market valuation, which CEO Louis Gerstner called "the ultimate measure of our performance,"grew by $23 billion. The company ended 1997 with $7.6 billion in cash.

The first quarter of 1998, however, saw IBM's first earnings decline in two years; the trend continued into the second quarter. But on July 30, 1998, IBM stock hit what Reuters described as "a lifetime intraday high" of $133.75, up 6, adding that "virtually all of Wall Street has turned bullish on IBM."

ANALYSTS' OPINIONS

A 1998 report by Salomon analyst John Jones stated, "We believe that IBM's software, PC servers and UNIX RS/6000 servers businesses are doing well." Gerstner would seem to agree. In the 1997 annual report he wrote, "IBM's comeback is on track and doesn't require a major course correction."

HISTORY

In 1910 Charles Ranlett Flint started the earliest ancestor of IBM under the name Calculating-Tabulating-Recording, or CTR, by merging three firms: International Time Recording Co., Computing Scale Co. of America, and Tabulating Machine Co. The last was founded by an engineer, Herman Hollerith, who had invented a tabulating machine—an apparatus that sorted and counted punch cards. This machine was first sold to the U.S. Census Bureau, and later to businesses that needed to organize large amounts of data economically. In 1915 Thomas Watson was hired as CTR's general manager and, by 1920, had built CTR into the leader in tabulating design.

CTR changed its name to International Business Machines—or IBM—in 1924. By focusing on large, custom systems for businesses, the company found that it had fewer competitors than those that made smaller, mass-produced systems. The company leased its products, instead of selling them, and reported profits throughout the 1920s. Initially, IBM held onto its market and customers by making punch cards that only worked with its own machines. By 1932, this policy had led to a U.S. government antitrust suit filed against IBM. At the time, IBM controlled 85 percent of the U.S. market for tabulating, keypunch, and accounting equipment.

The New Deal programs of the Depression years expanded government bureaucracy, which led to a need for large calculators; IBM supplied this equipment. World War II bolstered IBM's sales as well, and increased public and private-sector demand for tabulators helping to triple IBM's sales.

In 1956 IBM took the lead in the computer business by introducing its 705 general-purpose business computer. Institutional customers appreciated the way IBM's computers utilized the equipment that they had already leased or bought. The recognizable blue-suited sales force was instrumental in placing IBM's computers into businesses. In 1961 IBM released the Stretch computer system, which used a magnetic memory core and transistors instead of the more primitive vacuum tube technology. With the capability of performing up to three quarters of a million additions per second, the Stretch was the most powerful computer on the market.

In 1970 IBM introduced the first "floppy" (5 1/4 inch) disks, which were made by forming thin wafers of silicon and then cutting them into chips, thus setting the stage for much smaller systems. IBM subsequently released a new system, the 370 family. It was faster and could do more simultaneous tasks than prior systems. In 1973, IBM doubled the storage space on floppy disks with the 3340 disk storage unit, which functioned like main memory but at a much lower cost.

In 1975 IBM attempted to release its first personal computer, the 5100, weighing 50 pounds and costing about $5,000. Sales were disappointing. Realizing that demand for personal computers was minimal at the time, IBM focused on building mainframes. It was not until 1980 that IBM tried again to crack the personal computer market. By then, many other companies were already making the machines, and IBM was not able to gain immediate control of the market. That same year, it rolled out the IBM 3687 Holographic Scanner, which was used with the IBM 3683 supermarket terminal to read bar codes. Throughout the 1990s, IBM continued to grow by producing many new systems and personal computers, and by providing various consulting services. It expanded its overseas operations and, in the late 1990s, continued to dominate the mainframe and computer-related service markets.

STRATEGY

Bold letters on IBM's rich web site declare, "IBM is about TWO things: 1. Creating the industry's most advanced information technologies; 2. Helping customers apply that technology to improve what they do—and how they do it." Keen insight into the issues facing today's industries allows IBM to design products that deliver maximum impact and long-lasting value. In a December 1997 interview in U.S. News and World Report, CEO Gerstner explained IBM's developing view of itself as a provider of solutions to the customer's needs, "Our ability to integrate is a unique advantage of this company. So we said: All right, now let's go build a strategy around integrating the technology into solutions for customers. That was the fundamental decision we made."

Aside from the company's strategy as a vendor, Gerstner writes in his annual statement that IBM is "committed to maximizing shareholder value and to making productive use of our cash." Since 1995 IBM has made 45 strategic acquisitions. Its acquisition of Lotus Development Corp., the maker of the popular Lotus Notes messaging software, was significant and highly publicized; but each of the other corporate deals has been just as calculated to contribute to IBM's long-term success, as have been the decisions to decline certain takeover opportunities.

INFLUENCES

The hard times of the early 1990s were a great motivator for IBM, which many analysts had written off even before the stock price had fallen into the $40 range. Earnings lagged, and dividends were cut. The departure of CEO John Akers, and the accession of Gerstner (formerly the chairman of RJR Holdings Corp.) marked the start of IBM's slow climb back to viability. The 1997 annual report proudly states, "Our people have worked hard in recent years to reinvent not just the mechanics of their work, but also the soul of their company." However, Gerstner's statement identified one lofty ambition, still unfulfilled: "a return to industry leadership."

CURRENT TRENDS

One current, emerging growth area for IBM is "deep computing," which links high-speed computers and analytical software. A major customer for this technology is the U.S. Department of Energy, for whom IBM is building a supercomputer for use in nuclear-weapons simulation testing. IBM envisions the technology as being useful to the pharmaceutical industry in simulating chemical reactions, and to the business world in providing financial modeling. In the mid-1990s, two celebrated face-offs pitted Russian chess grandmaster Gary Kasparov against "Deep Blue," an IBM RS/6000 SP supercomputer that utilizes deep computing technology. NASA's 1997 Pathfinder mission to Mars included an IBM RS/6000 as its onboard flight computer. Also in space that year were several IBM ThinkPad laptop computers missions.

In April of 1998 IBM announced its new "E-business Tools" line, comprised of servers, work stations, PCs, and notebooks for the purpose of facilitating business transactions over the Internet. The products include the Netfinity 3000 and 5500 servers, hard-disk and tape-drive storage devices, the IntelliStation M Pro workstation, the PC 300 PL personal computer, and an enhanced palm-sized computer, all available through IBM's web site. In a Wired News interview, IBM's vice president of Internet technologies, John Patrick, said of the development, "This concept that we are on, e-business, is not just e-commerce. It's about making a company into an electronic business where all the transactions become network-centric. When you do this, the transactions go up dramatically. And when the transactions go up, you need more disk space, and processing power, and infrastructure, and systems integration skills, and strategic planning. Well, those happen to be things we are really good at." An extensive marketing campaign in 1997 demonstrated the value of a "networked world."

In May of 1998, IBM announced its plans to support IDT Corp's Net2phone Internet-phone service, which allows long-distance telephone calls to be placed via computer. The software will be included with IBM's Internet access materials.

PRODUCTS

IBM makes leading computer hardware and software, and provides consulting services through its IBM Global Services unit. Hardware products include mainframes, servers, midrange, and desktop machines. Recent introductions include the Thinkpad 560, which weighs only 4.1 pounds and has one of the sharpest and largest screens in its class, and the enlarged Aptiva line of personal computers, which allows the monitor and media drives to be placed on the desktop, with the tower located elsewhere. The IBM Network Station allows businesses to access the Internet on a large scale. IBM's 1996 investment of $4.7 billion in research and development toward embedded microelectronics for digital devices—a method for bringing clear video to desktop computers—yielded the Voice Type Simply Speaking software, which allows the user access to applications by way of voice control. Lotus Notes, dubbed in the 1996 annual report "a human transaction system," allows team members across an organization to integrate their collective work more efficiently. IBM Global Services, a $19-billion business that experienced double-digit growth for more than 20 straight quarters in the mid- and late 1990s, assists customers with installation and implementation of their IBM machinery. In 1998, IBM's Internet service had about 750,000 subscribers.

CORPORATE CITIZENSHIP

IBM is the largest corporate contributor in the world. A $35-million grant program called "Reinventing Education" uses technology to improve education—for adults and children alike—all over the world. In South Africa, the program has provided computers to schools and helped to train teachers to use them. Plans are in place to do the same in Vietnam, Ireland, and India. Annually, IBM donates millions of dollars worth of new technology to more than 1,600 domestic nonprofit health and human services entities via the United Way. During 1997 IBM employees donated $30 million in matching grants to local nonprofit organizations and schools. That same year the Environmental Protection Agency (EPA) recognized the company's efforts to eliminate the use of ozone-depleting chemicals (more than 15 million pounds since 1983). In 1998 President Clinton presented IBM with the Ron Brown Award for Corporate Leadership, which recognizes organizations for excellence in employee and community relations.

GLOBAL PRESENCE

IBM has a presence in more than 160 countries. It works with more than 1,000 businesses in central Europe and Russia alone, and is the leading vendor of personal computers in China. IBM's Global Campus Solution serves universities in the United States, Australia, Latin America, and Europe. Even in its research, IBM expands globally, with labs in Beijing working on Java, a programming language for use on the Internet.

EMPLOYMENT

IBM aims to be an employee-friendly institution. A survey by the National Society of Black Engineers found IBM to be its members' preferred employer. The company and its subsidiaries offer defined benefit and contribution plans to employees and a supplemental retirement plan to certain executives. In 1995, with Gerstner's endorsement, the company sent its long-famous dress code the way of the abacus, no longer requiring suits, hoping to foster comfort at all levels.

SOURCES OF INFORMATION

Bibliography

Behr, Peter, and Brett D. Fromson. "The Monumental Task of Rebuilding Big Blue." Washington Post, 26 March 1993.

Berger, Joseph. "Black Jeans Invade Big Blue." New York Times, 6 February 1995.

Cook, William J. "Interview with IBM CEO Louis Gerstner." U.S. News Online, 19 December 1997.

Faiola, Anthony. "Big Blue—Jeans, That Is." Washington Post, 4 February 1995.

"IBM." Hoover's Online, June 1998. Available at http://www.hoovers.com.

IBM Home Page. June 1998. Available at http://www.ibm.com.

"IBM Leads in U.S. Patents for Fifth Year in a Row." IBM Press Release, 12 January 1998. Available at http://www.ibm.com.

"IBM Names Chief Financial Officer." IBM Press Release, 14 April 1998. Available at http://www.ibm.com.

"IBM Receives Ron Brown Award for Corporate Leadership." IBM Press Release, 12 February 1998. Available at http://www.ibm.com.

"IBM Stock Hits High as Wall St. Is Solidly Bullish." Reuters, 30 July 1998.

"IBM Unveils New Computer Products." AP, 15 April 1998.

Jorgensen, Janice, ed. Encyclopedia of Consumer Brands. Vol. 3. Detroit: St. James Press, 1994.

Martin, Jonathan. International Directory of Company Histories. Vol. 3. Detroit, MI: St. James Press, 1994.

Melville, Richard. "Focus—IBM Says It Earned __BODY__ Billion in First Quarter." Reuters, 20 April 1998.

——. "Gerstner: 1997 'A Great Year' For IBM Technology." Reuters, 28 April 1998.

Schiesel, Seth. "IBM Teams Up with Internet Phone Service." New York Times, 18 May 1998.

For an annual report:

on the Internet at: http://www.ibm.com or telephone: (800)426-3333

For additional industry research:

Investigate companies by their Standard Industrial Classification Codes, also known as SICs. IBM's primary SICs are:

3571 Electronic Computers

3572 Computer Storage

3575 Computer Terminals

3577 Computer Peripheral Equipment

7371 Computer Programming Services

7372 Prepackaged Software

7373 Computer Integrated Systems Design

7374 Data Processing and Preparation

7375 Information Retrieval Services

7377 Computer Rental and Leasing

7378 Computer Maintenance and Repair

7379 Computer Related Systems