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IBM taps new president, vice chairman

Big Blue names Sam Palmisano to become its president and chief operating officer and John M. Thompson to the position of vice chairman in what could be the first stages of a succession plan for Lou Gerstner.

\ IBM has named Sam Palmisano to become its president and chief operating officer and John M. Thompson to the position of vice chairman in what could be the first stages of a succession plan for Lou Gerstner.

Samuel Palmisano The promotions of the longtime IBM veterans come at a time of inconsistent growth for Big Blue. In recent quarters, IBM has seen strong growth in software sales, microelectronics, notebooks and Web servers. On the other hand, the company has been losing market share in PCs while mainframe and services sales have been relatively lackluster recently.

Palmisano, who was touted in the past as a candidate for the CEO slot at Apple Computer and Hewlett-Packard, will assume responsibility for IBM's operating units, including all product and services divisions as well as the company's sales and distribution and global financing businesses.

Thompson, meanwhile, will be responsible for integrating and accelerating IBM's efforts in emerging growth areas such as Internet services, wireless technology and Linux.

Analysts were upbeat about Palmisano's promotion, sensing that the 48-year-old executive could revive IBM's competitive nature.

"He is very, very blunt. He's somewhat more jocular than Lou (Gerstner) and certainly more of a street fighter, yet he is very smart. He does everything with a certain amount of gusto," said Daniel Kunstler, an analyst with JP Morgan Securities. "It sort of smells like heir apparency."

A Gerstner-Palmisano team, he added, could potentially function like the Scott McNealy-Ed Zander team at Sun Microsystems. Palmisano could serve as the outspoken executive, like Sun CEO McNealy, while Gerstner could operate in the background, similar to Zander, Sun's president.

Piper Jaffray analyst Amir Ahari described Palmisano as the "wunderkind" and "the likely candidate being groomed to replace Gerstner."

When Gerstner joined IBM, he largely brought outsiders to advise him on operations, but "Palmisano was one of the very few IBM insiders allowed in that inner circle," Ahari said. "He's been the guy in charge of (server) business units from day one, and he's done a pretty good job."

A representative for the company said the duties of the two executives could roughly be divided by time. Palmisano, who will oversee eight divisions including the PC division, will be responsible for the day-to-day operations of the company. By contrast, Thompson will focus on future opportunities.

IBM has not made a significant management change in seven years at this level, she added.

Long track records
Both Palmisano and Thompson have been with IBM for decades. Palmisano joined the company in 1973 and currently serves as a senior vice president of the company's server division.

Thompson, who joined IBM in 1966, has been serving as senior vice president and group executive of the IBM software group.

Thompson's move from software to the Internet and wireless is seen as a savvy move, as it encompasses IBM's broader software strategy. Big Blue has been increasingly using its WebSphere middleware as a development and delivery vehicle for a variety of Web and wireless initiatives, such as enabling Internet call centers and creating wireless airline ticketing using Palm handhelds.

"It's the software that really matters in terms of IBM hardware and modifying Linux as the unifying platform; he should provide some value add," Ahari said. "He can ensure that DB2 and some of the other middleware can integrate with the entire IBM platform and the OS of choice."

Software has been one of the highlights of IBM's financial performance in recent quarters, led by sales of the company's Websphere middleware product. Two-thirds of IBM's software revenue--which totaled $12.7 billion last year--comes from middleware, such as database, transaction processing, system management, groupware and messaging software.

In the second quarter, middleware revenue grew 11 percent, with WebSphere up 200 percent year over year. Middleware, which accounts for two-thirds of IBM's software revenue, grew best on Unix and Windows NT, gaining 34 percent.

Another former high-level executive at IBM--John W. Thompson--left the company earlier to become CEO at Symantec.

The appointments take effect Sept. 1. The announcement was made in advance of a meeting of IBM's board.

"As we enter the next phase of IBM's transformation, we need a new organizational approach that will strengthen our focus on both day-to-day marketplace results and future growth opportunities," Gerstner said in a statement. "I believe this new structure is the best way to accomplish these goals, under the leadership of two of IBM's most experienced and capable executives."

Last week, the company reported earnings of $1.9 billion, or $1.06 per share, for the second quarter, beating the lowered consensus estimate of $1 per share. The Armonk, N.Y.-based company posted 91 cents per share a year earlier, excluding extraordinary events, giving it a 16 percent increase in profit.

Revenue, however, declined by 1 percent year over year to $21.7 billion. Second-quarter 2000 net income totaled $1.9 billion, compared with $1.7 billion--excluding one-time events--for the same period a year before.

International Data Corp. analyst Roger Kay speculated Palmisano was being groomed to replace Gerstner.

"It sounds like a big guy pushing back from the table," he said. "It's saying, 'I've had my fill and I'm not going back to the buffet let me go and do something exciting and different.'"

The IBM representative stated that "succession is a matter for the board of directors."

IBM with the announcement named new vice presidents: Robert Moffat will replace David Thomas as general manager of the PC division, while Bill Zeitler will head the server group and Linda Stanford a new storage division. Steve Mills was promoted to senior vice president of the software group, where he succeeds Thompson, and John Kelly to senior vice president of the technology group.

Gartner analyst Tom Bittman said Palmisano is an extrovert, "as opposed to John M. Thompson, who is one of the better visionaries--maybe the best visionary--of the company. He's done a pretty good job in software but is not nearly as much as a Scott McNealy type of person. I think Palmisano is being set up to take that role, but John M. Thompson is being put in a role where he can still have a strong hand on the tiller of the company."

Long term, Bittman predicted a split job, "where John M. becomes chairman of the board and Palmisano remains president."