USA: TALKING POINT/IBM CORP REORGANIZATION.

Date: Jan 9, 1995

By Therese Poletti

NEW YORK, Jan 9 (Reuter) - International Business Machines Corp's sweeping reorganization Monday aims to grow its huge but problematic software business and streamline the sales force as IBM heads into the second phase of its restructuring.

Analysts said IBM chairman and CEO Louis Gerstner is creating a new sense of urgency at the computer giant with his latest moves, which included the retirement of two IBM senior vice presidents, Ellen Hancock and Bob LaBant.

"This is just one more step in breaking down the old IBM culture," said Bill Milton, a Brown Brothers Harriman analyst.

"The message is, no one's job is safe at IBM," he added.

Gerstner, who implemented a successful financial turnaround at IBM since taking over the computer giant in 1993, is now focusing on how IBM can grow its revenues, now that its balance sheet is in order and its costs are lower.

"He recognizes that he needs to focus on software," said Sam Albert, a Scarsdale, N.Y.-based consultant. "He wants the world to know that IBM does $11 billion in software business."

But analysts are skeptical that IBM's software business can really become one of its growth engines for the future, unless the company plans to develop an applications business.

As part of the reorganization plan, Gerstner formed an IBM software group and named John Thompson, an IBM senior vice president, to its helm. Thompson is one of the executives credited with the turnaround in the company's mainframe operations and Gerstner hopes he will turn around software.

But a big chunk of IBM's software business comes from its proprietary mainframe software business, where it sells operating systems, database software, tools and other programs to IBM mainframe computer customers. Analysts estimate that slightly under $7 billion in software revenues are related to mainframes. The rest comes from PCs, minis and workstations.

While mainframe computers have been rebounding in the past year, they do not represent a growth engine for IBM. The growth potential is in PC software, where IBM's biggest entry is its OS/2 Warp operating system.

But Milton of Brown Brothers said "It's too late for OS/2." He said he does not believe Warp will ever become a serious challenge to Microsoft Corp's dominance on the desktop with DOS/Windows. "My advice to them would be if you want to raise your profile in software you get into the areas of higher growth and that is the applications side." Applications are programs like word processors or spreadsheets.

IBM's new structure moves the networking hardware segment to servers and brings all the software together so IBM can focus on growth areas. Proprietary operating systems for mainframe and minicomputers will remain with their hardware businesses.

The move to unify sales under one executive, Ned Lautenbach, is eliminating an old IBM concept of the World Trade division, which referred to everything outside North America. Analysts were surprised by the abrupt resignation of LaBant, who was passed over to head up worldwide sales. LaBant was offered another job within IBM, but he decided to leave.

"The frustrating thing here is that he is shaking up management but he is using internal people," said Curt Rohrman, a First Boston analyst. "He continues to shift the bodies around around on the ship and they face some pretty difficult problems."

The Wall Street Journal reported Monday that more IBM top executives could be on their way out, as the impatient Gerstner seeks to avoid a return to complacency and arrogance amid a dramatic financial comeback. The paper said that chief strategist James Cannavino is on thin ice and Lee Reiswig, who heads up OS/2, could be next to go. IBM declined to comment.

(c) Reuters Limited 1995. All rights reserved.