IBM preparing to cut thousands of jobs

NEW YORK - International Business Machines (IBM), faced with stagnant sales due to a technology spending slowdown, is poised for its largest work force reduction in a decade, according to a person close to the situation.

The source said the job cuts are anticipated at between 2.5 per cent and 3 per cent of the world's largest computer maker's 318,000-member work force, or between 7,950 and 9,540 workers.

Most of the cuts are expected to take place in the second quarter and are targeted at specific divisions rather than the entire company.

Analysts have widely anticipated the reductions since last month, when IBM reported a sharper than expected 30 per cent decline in first-quarter earnings, its biggest drop since the emerging from a period of losses in 1993.

A spokesman for the Armonk, New York, company declined to comment.

We're constantly rebalancing our work force according to market conditions," he said.

Indeed, IBM in recent years has made mostly small cuts in specific divisions as part of what it calls skills rebalancing.

For instance, in November it cut 1,000 people from its semiconductor division, which is suffering from the worst industry downturn in a decade.

Still, the work force reduction comes at a time when job cuts in the computer industry are waning, according to data from Chicago outplacement firm Challenger, Gray & Christmas. In the first four months of 2002, job cuts in the sector fell to 21,640 from 53,774 a year earlier, it said.

IBM shares were down 42 cents at $79.51 in afternoon New York Stock exchange trade.

Last year, when other tech companies were slashing their headcount as hardware sales dried up, IBM was adding staff as its strong services revenue offset weakness elsewhere. But that strength began to erode in the fourth quarter as customers cut spending on services too.

"The cycle has impacted IBM with a bit of a lag compared with others," J.P. Morgan analyst Daniel Kunstler said. Hardware operations and some services, particularly consulting and systems integration, have apparently stalled out, he said.

But Kunstler said he doesn't expect the cuts to hurt the company's competitive position. "I would not equate percentage of job cuts with any kind of material loss of market share," he said, "at least not in the areas where they want to have market share."

The anticipated cuts come only a few months into the tenure of Chief Executive Sam Palmisano, who took over from Lou Gerstner on March 1.

In his nine years as CEO, Gerstner was credited with turning the loss-making company around.

He remains chairman through to the end of the year.

Palmisano told employees on April 24 that IBM would have to pare its work force because of the decline in corporations' demand for technology, according to an investor newsletter that published an edited transcript of the broadcast this week.

Gartner Inc. research director Tom Bittman said he expects the first cuts to be in the Global Services division, which accounts for about half of IBM's employee base and more than 40 per cent of revenue.

"I wouldn't be surprised to see numbers in the thousands in Global Services," Bittman said. "That would be the easiest and probably the least painful area where IBM could make cuts."

In addition, he said, the software division and departments associated with IBM's large computers for businesses may also need to cut staff.

In the first quarter, revenues fell 2.9 per cent for global services, 0.7 per cent for software revenue and 21 per cent for enterprise systems, which include large computers and data storage machines.

SoundView Technology analyst Gary Helmig said earlier this week that he expects about a 10 per cent reduction in IBM's North American sales and distribution force, which he estimates is currently about 10,000 people.

"Their revenue is going to be down," Helmig said. "And you don't need to have as much structure to support it."

Analysts on average estimate 2002 revenue of $83 billion, down from $85.9 billion in 2001, according to Thomson Financial/First Call.

The anticipated work force reductions would be the largest for IBM since the early 1990s, when it made several rounds of cuts in chunks of 10,000 to 20,000.