Palmisano, currently IBM's president and chief operating officer, has been widely expected to take over for Gerstner, who has been credited with transforming IBM from a lumbering giant into a profitable services titan.
Although he will step down as CEO, Gerstner will remain chairman through 2002.
IBM also announced that John M. Thompson, IBM vice chairman, will retire from the company and board on Sept. 1.
The IBM board met Tuesday to officially vote on the management change, according to the company. Gerstner also told employees of the change in aTuesday morning.
"From March 1 on, Sam is our new leader. My job will be to help him in whatever ways he seeks my time and counsel," Gerstner said in the note. "There is no rule or age limit that requires me to do this now. I am doing it because I am convinced that the time is right. The company is ready, and so is the new leader."
With Palmisano, IBM will have a CEO who is clearly familiar with the company's operations. The 50-year-old executive has managed a number of Big Blue's divisions, including the . He also ran Asian operations for a time. He joined the company in 1973 as a sales representative and became president in September 2000.
"Over the last decade, Sam Palmisano has taken on a number of IBM's most significant challenges, from building the services business to transforming our server line," Gerstner said in a statement. "In each instance, Sam has done far more than manage operations effectively. He has made it both his personal mission and that of IBM to become the No. 1 competitor in each of these markets."
Gerstner, 59, joined IBM in April 1993 during one of the dark times for the venerable computing giant. The company was a sprawling organization, according to analysts, and was losing market share to Compaq Computer, which would soon surpass IBM as the world's largest PC maker. Gerstner replaced many longtime IBM executives and began to trim back unproductive units.
Now, instead of being a company that participates in nearly every market, IBM picks its battles. It has become the largest computer consulting and services company in the world. IBM Microelectronics supplies chips to Apple Computer, as well as hard drives and other components to Dell Computer, Compaq and other competitors. IBM also generally files--and wins--more patents than any other company in the world.
In servers, IBM has been able to distance itself from competitors, most notably Sun Microsystems, through aggressive programs to incorporate itsinto more cost-conscious corporate machines. IBM also threatens EMC in storage.
Big Blue, however, still loses money on, a market it helped launch.
In all likelihood, Palmisano will continue to push the company in the directions already set by the current management structure. Servers have been a huge part of IBM's rebound; part of the revitalized server push came when Palmisano headed the server division.
"It would be interesting to see if he makes any changes. I can't imagine there are many holes in the IBM strategy he would be looking to repair," Technology Business Research analyst Bob Sutherland said. "I think that it's welcome news, but it's overdue. Customers, employees and investors probably wanted things to happen sooner."
IBM has already retrofitted management to serve Palmisano. When IBM elevated Palmisano to president and COO in September 2000, the company also appointed other senior-level managers in a broad.
Those executives include Robert Moffat, who run's IBM's PC business; Bill Zeitler, head of the server group; Linda Sanford, IBM's storage chief; Steve Mills, IBM's software boss; and John Kelly, who runs the company's technology group. These executives will likely keep their current positions.
Investors in the company, and an IBM executive, shrugged off the impact of the change.
Speaking at the Banc of America Securities Technology Conference in San Francisco, IBM Senior Vice President John Kelly said both Gerstner and Palmisano have been involved in the recent decisions about IBM's business.
"We have constantly on a quarterly basis not only reviewed the business output of our divisions, but also the strategy," Kelly said. "Both (Gerstner and Palmisano) have been heavily involved. In my mind there is no discontinuity or disruption" associated with the change.
Andy Liersch of Parnassus Funds, which owns IBM shares, said the change has been expected for some time and the impact should be minimal.
"I would expect it to be business as usual," Liersch said.
IBM is one of the world's largest and most storied corporations. Big Blue was officially born in 1911 as the Computing-Tabulating-Recording Company, a conglomeration of other companies that started in the 1880s. Since then, the company has been instrumental in the development of mainframes, calculators, personal computers, networking, software, and several scientific breakthroughs. Four IBM researchers have won Nobel prizes. Palmisano will be the company's eighth CEO.
In 2001, the company reported $88.4 billion in revenue and $7.7 billion in earnings. The company employs more than 300,000 individuals.
Palmisano has also been one of the company's leading advocates ofLinux. Until the emphasis on , IBM promoted an array of operating systems for servers and mainframes.
"We don't invest a billion dollars casually," Palmisanoa LinuxWorld audience last year, commenting on IBM's plan to spend $1 billion on Linux during 2001. "Lou (Gerstner) and I don't write those checks without some...scrutiny."
Gartner analyst Thomas Bittman says companies can expect major changes at IBM under new CEO Samuel Palmisano, including new technology investments and marketing changes.
"Palmisano, we think, is going to be in many ways the exact opposite," said Gartner analyst Tom Bittman. "We see Palmisano being put much more in the limelight as a public personality for IBM. I think it's going to help IBM to be identified more with someone like Palmisano.
"Right now, you don't see IBM as a person...you see IBM as a big machine you're going to get lost in. Over time, I think you're going to see him put out there in Comdex kinds of settings...and he's going to be talking technology," said Bittman.
Still, Gerstner has been credited with toning down some of the more imperial aspects of IBM's culture, according to sources. In the pre-Gerstner era, corporate executives were treated like visiting dignitaries. Entire facilities would be repainted for a visit from the CEO, sources have said. Clean rooms dedicated to hard drive research would also be revamped, and production would be stopped to accommodate short tours from the top exec.
Even after 2002, Gerstner may participate in decisions at IBM. In 1998, IBMGerstner's contract, giving him a 10-year consulting contract after his retirement.
News.com's Ian Fried, John Spooner and Joe Wilcox contributed to this report.