IBM Investors See Stability in Palmisano as CEO

IBM CEO Sam Palmisano
Sam Palmisano, chief executive officer of International Business Machines Corp. Photographer: Paul Morse/Bloomberg

International Business Machines Corp. shareholders expressed relief after Chief Executive Officer Sam Palmisano indicated he may not step down next year, breaking with precedent at the company.

Palmisano, who will turn 60 next year, said the practice of the company’s CEOs leaving the position at that age isn’t “cast in stone.” Three of IBM’s past four CEOs have stepped down at that age, with the exception being John Akers, who was forced out by IBM’s board before he reached 60.

“There’s no formal policy,” Palmisano said in response to a question at the Wall Street Journal Viewpoints Executive Breakfast Series in New York yesterday. After a follow-up question about retirement, he said, “I’m not going anywhere.”

Palmisano’s comments may reassure shareholders that the world’s largest computer-services provider isn’t running against a deadline to find a new leader, said Pete Sorrentino, senior portfolio manager at Huntington Asset Management in Cincinnati.

“They’re focusing on getting it right as opposed to getting it done,” said Sorrentino, who helps manage 849,000 IBM shares. “That takes an element of risk out of IBM.”

Palmisano, who has led the company since 2002, shuffled his top management in July, giving more responsibility to several executives and fueling speculation he is preparing to step down. Ginni Rometty, a senior vice president, gained responsibility for marketing and strategy in addition to her position as head of sales. Mike Daniels, the senior vice president leading technology services, took on the consulting business as well.

Relying on Insiders

Both have been mentioned by analysts and former employees as candidates for the CEO post when Palmisano retires. IBM has brought in a CEO from outside the company only once, when it named Lou Gerstner to succeed Akers in 1993.

Since taking the helm eight years ago, Palmisano has divested hardware businesses, including the personal-computer division, and focused IBM on more profitable software and services through more than 100 acquisitions. Now IBM is the third-largest software maker, trailing only Microsoft Corp. and Oracle Corp.

“Sam’s the known quantity,” said Richard Glasebrook, managing director of Straus Group, a unit of Neuberger Berman, which owned 11 million IBM shares as of June 30, according to data compiled by Bloomberg. “He has led the company through some significant trials and tribulations with the global economy, and he’s come through pretty well.”

‘Certainly a Positive’

In May, Palmisano told investors that operating earnings will almost double to $20 a share by 2015, as it gains more revenue from emerging markets and technology such as analytics and cloud computing. The software business, the company’s most profitable, will make up about half of total earnings in five years, he said, compared with 42 percent last year.

“If you’re a long-term shareholder, having him run the company for as long as he can is certainly a positive,” said Amit Daryanani, an analyst at RBC Capital Markets.

The stability at IBM contrasts with the situation at rival Hewlett-Packard Co., Sorrentino said. Since HP CEO Mark Hurd stepped down Aug. 6, the company has gotten involved in a bidding war for storage-maker 3Par Inc., made a second acquisition for more than $1 billion and announced a $10 billion stock buyback -- while searching for a permanent replacement.

“They’re doing deals with nobody at the wheel,” said Sorrentino.

Risks of Waiting

IBM, based in Armonk, New York, rose 58 cents to $129.43 at 4 p.m. in New York Stock Exchange composite trading. The shares have slid 1.1 percent this year, compared with an increase of less than 1 percent for the Standard & Poor’s 500 Index.

The company runs the risk of losing top executives to competitors if Palmisano waits too long to step down, said Paul Meeks, an analyst at Capstone Investments.

“People, particularly folks that are interested in those positions -- aggressive, AAA+ personalities -- might not want to wait around,” said Meeks, based in Charleston, South Carolina.