IBM plans to slash as many as 13,000 jobs

Peter J. Brennan

Thursday, May 5, 2005 | 9:51 a.m.

International Business Machines Corp., the world's biggest computer-services company, said it will cut as many as 13,000 jobs, or 4 percent of its workforce, mainly in Europe because of a slowdown in technology spending.

IBM on Wednesday announced its biggest round of job cuts since 2002 after quarterly profit trailed forecasts and the stock had its longest streak of daily declines in more than three decades. The company has about 100,000 employees in Europe, the Middle East and Africa; and 329,000 worldwide.

European companies are putting off technology purchases and the region's spending growth may lag behind the United States this year, according to researcher IDC. In April, IBM said first-quarter results were dragged down by sales declines in Germany, Italy and France, missing analysts' expectations. The cuts are part of a plan by Chief Executive Sam Palmisano to move operations to areas that are expanding.

"Anything that addresses their cost structure and improves their returns should be viewed as a positive, considering the hardware business is essentially becoming a commodity and demand for outsourcing services has shown signs of weakening," said Ted Moore, an analyst at National City Private Client Group of Cleveland, which manages $26 billion, including IBM stock. "This is a good action both for the short and long term."

Intel Corp., the world's biggest computer-chip maker, will hold its annual Spring meeting with analysts today. The Santa Clara, Calif.-based company last month raised its profit-margin estimate for 2005 and said first-quarter earnings climbed 25 percent. Intel's chips power more than 80 percent of the world's personal computers. The analyst meeting is scheduled to begin at 1 p.m. in New York.

Shares of Armonk, N.Y.-based IBM rose 92 cents to $78 in extended trading after Wednesday's announcement. The stock had added 61 cents to $77.08 as of 4 p.m. in New York Stock Exchange composite trading and fell 14 days in a row last month.

IBM will keep "significant" operations in Paris and open smaller hubs in Madrid and Zurich, spokesman Ed Barbini said. He declined to say where IBM will make cuts. The company will use smaller local units to let employees work more closely with clients. IBM Chief Financial Officer Mark Loughridge discussed the plans on a conference call at 8 a.m. New York time.

First-quarter sales, adjusted for currency moves, fell 8 percent in Germany, 7 percent in Italy and 3 percent in France, IBM said on April 14.

IBM "clearly had problems" in these countries, Loughridge told analysts on a conference call at the time.

Sales rose 3.3 percent to $22.9 billion, missing the $23.7 billion expected by analysts in a Thomson Financial survey. That was the slowest pace in 10 quarters.

"We had difficulty closing transactions in the last two weeks of the quarter, particularly in countries with soft economic conditions," Palmisano told shareholders last month, citing Japan as well as Germany, France and Italy.

Hewlett-Packard Co., the world's largest maker of printers, said yesterday it cut more than 1,900 jobs in the United States and Puerto Rico to help stem declining profit. Earnings in the printing group, which accounts for more than two-thirds of Hewlett-Packard's profit, fell 3.6 percent last quarter.

IBM's cuts are the biggest since 2002, when Palmisano eliminated 15,600 jobs. Top managers are giving up pay increases and the company last week boosted its dividend and began its biggest-ever stock buyback to shore up IBM's stock price.

IBM plans to shift resources to higher-growth markets.

In the first quarter, China, Russia, India and Brazil had a combined sales increase of 18 percent to more than $1 billion, Loughridge said in April.

"The company will continue to shift investment to these geographies to better address these important markets," Loughridge told analysts at the time.

Last year, revenue from Europe, the Middle East and Africa rose 15 percent to $32 billion, the fastest-growing regions for IBM in 2004.

The elimination of jobs and other moves will result in pretax costs of $1.3 billion to $1.7 billion this quarter and generate savings beginning in the second half, IBM said.

The plan could yield up to 50 cents a share in savings, UBS Securities analyst Ben Reitzes wrote in a note yesterday to investors.

"While execution could prove difficult, we view it favorably given recent woes in the services division," he wrote. Reitzes had predicted on April 25 that IBM would cut 10,000 jobs.

Loughridge in April said the restructuring would help IBM meet analysts' estimates for second-half profit. Analysts now expect the company to earn $2.98 a share in the period, compared with $3.04 when Loughridge made his comment on April 14.

"If they're going to make their second-half numbers, they were going to have to make some adjustments, such as job cuts," said Chuck Jones, an analyst at San Francisco-based Stein Roe Investment Counsel, which manages $15 billion, including IBM shares. "From what's been talked about the last two weeks, that's the number and geography that people were looking for."