Faith In A Stranger

Avid golfer Lou Gerstner will have particular reason to remember this year's Nabisco Dinah Shore Ladies' Professional Golf Assn. tournament. As CEO of RJR Nabisco Holdings Corp., he has presided over the event for years. This will be his last. During the tournament, he informed three partners of Kohlberg Kravis Roberts & Co., RJR's largest shareholder, that he's stepping down. The KKR partners--Henry R. Kravis, George R. Roberts, and Paul E. Raether--could not talk Gerstner into sticking with the food-and-tobacco giant. On the morning of Mar. 24, an RJR corporate jet lifted off the ground near Rancho Mirage, Calif., and Louis V. Gerstner Jr., 51, headed toward his future--as the next chief executive of battered computer giant IBM.

Why Gerstner? Pending an official announcement--probably before the IBM board's Mar. 30 meeting--neither Gerstner nor IBM is talking. Barring last-minute glitches in contract negotiations, however, Gerstner will move into IBM's executive suite shortly thereafter. If he can successfully remake IBM, he'll clearly be a hero of monumental proportions. Gerstner's challenge "ranks up with [AT&T Chairman Robert E.] Allen's task and [Chairman John F.] Welch's at GE," says management guru David A. Nadler, president of Delta Consulting Group Inc. Indeed, Nadler says Gerstner's job will be even more difficult than the one new CEO John F. Smith Jr. faces in turning around General Motors Corp. "GM knows what business it's in--making vehicles. It needs to make them cheaper and better. But with the dramatic decline of the mainframe, IBM isn't clear what business it's in anymore."

The RJR executive emerged as the top candidate in mid-March. In the eight weeks since Chairman John F. Akers announced that he would relinquish the CEO post, the search for an outsider to turn Big Blue around turned into a media circus. One by one, high-tech veterans, from Apple Computer Inc.'s John Sculley to Motorola Inc.'s George Fisher, dropped out of the race, leaving Gerstner the top contender.

Gerstner is a remarkable choice for what he doesn't bring: experience in running a computer company--although he does have an IBM personal computer in his office, unlike Akers. Gerstner's background, some IBM-watchers say, may be what makes him the best person for the job, since he brings little baggage to IBM's austere Armonk (N.Y.) headquarters. Unlike a veteran IBMer, he won't have ties to Big Blue tradiAnd unlike other high-tech executives who grew up competing with IBM, Gerstner, described by colleagues as a roll-up-his-sleeves kind of guy, will bring a new perspective to IBM's various businesses. "I've never subscribed to the theory that IBM needs a technical visionary," says Merrill Lynch & Co. analyst Daniel Mandresh. "They have technology aplenty. It's just that it wasn't producing results." Adds Allen, who has just named a noncomputer executive, Jerre Stead, to run AT&T's NCR Corp.: IBM may "need the influence of some new thinking, people who haven't spent their whole lives in the IBM environment."

Gerstner certainly fills that bill--and his fresh eyes will come in handy in deciding whether to keep the game plan that Akers announced in late 1991. Then, Akers set in motion a reorganization to break IBM into 13 "Baby Blues," each of which would be free to pursue its own destiny--and some of which might be broken off into separate subsidiaries or even spun off entirely. In that scenario, Armonk functions largely as a holding company, managing a portfolio of companies. "If you buy into this IBM-as-holding-company concept," says one IBM insider, Gerstner's appointment "is not an outrageous deal at all. A lot of people in the company think it makes perfect sense."

Gerstner is no stranger to turnarounds. "I love to build companies more than anything else," he told BUSINESS WEEK in a 1989 interview. Gerstner, who grew up in Mineola, N.Y., and received an engineering degree from Dartmouth and an MBA from Harvard, began his career as a corporate fixer at McKinsey & Co. in 1965. At 31, he became the youngest person ever to make senior partner there. In 1978, he joined American Express Co. and, as AmEx president from 1985 to 1989, increased net income by 66%, partly by making the company's charge card an elite must-have of the glitzy 1980s.

When he arrived at RJR in 1989, following its record-setting leveraged buyout, the conglomerate was carrying a $26 billion debt load. That, he said at the time, made the No.1 post at RJR the "hardest job in America." Now in year four of a five-year turnaround plan, RJR's debt is down to about $14 billion, giving it a livable debt-to-equity ratio of just 1.6:1, compared with 20:1 four years ago. And while he cut costs, he also pushed for new products, new marketing initiatives, and even managed a few niche acquisitions. "In his first 100 days, he was remarkably quick in making decisions," Nabisco Chief H. John Greeniaus said at the time.

If his record at AmEx and RJR is a guide, Gerstner will have little trouble slashing IBM's payroll, which some outsiders contend should be cut by a further 80,000 to 100,000. At RJR, he trimmed 3,000 jobs out of 60,000, saving $550 million in annual costs. "I don't think corporate headquarters should sit on top of the operational subsidiaries," he told BUSINESS WEEK in 1989. "I think you should decentralize everything you can...The burden of proof should always be on those who want to centralize."

Simply put, he has the guts to slash and burn. A former colleague at AmEx, where Gerstner once referred to employees as "units," says: "His idea of business is all analytical. He has no patience for managers who built the business. He'll look at the numbers and, if they aren't good, he'll fire people." Gerstner, in other words, may be just what IBM needs, says the AmExer. "He's a tough manager," says a CEO who sits on a board with him. "He'll do what needs to be done," like burying the old culture, which Akers tried valiantly to preserve.

Inbreeding, for example, has been a big part of the computer maker's problems. Managers weaned on mainframes misread its troubles as only temporary. So, IBM went through several rounds of cutbacks in the late 1980s. But the company never got its costs down to the point where it could compete profitably in markets such as PCs and workstations. In 1991, Akers started cutting deeper--leading to a $2.9 billion loss that year and $5 billion last year. And because sales of products such as mainframes have slowed, IBM has also seen revenue shrink in the past two years--the first time that has happened since 1946. By January, when Akers announced his plan to step down, the stock had sunk to a 17-year low of less than $46.

PUBLIC DEBACLE. There are few encouraging signs now. In the past week, Mandresh and other analysts have cut earnings projections for 1993, and some are predicting another operating loss. That may explain why the search for Akers' replacement turned into such a public debacle. "I've never seen a situation where so many well-known CEOs have not wanted a job," says one candidate. Sculley of Apple, a favored pick of many IBM employees and customers, took himself out of the running, and his example was quickly followed by several other industry luminaries, including AlliedSignal CEO Lawrence A. Bossidy. Eventually, the search committee of seven outside directors, led by retired Johnson & Johnson Chairman James E. Burke, focused on the non-techies on their list.

Now that Gerstner has been identified as the layman Mr. Outside, IBM-watchers and company insiders expect the board to name a technologically correct insider as his right hand, replacing former IBM President Jack D. Kuehler. James A. Cannavino, 48, head of the Personal Systems division, is believed to be among the top choices. Cannavino has headed the PC and workstation business since 1989. Before that, he ran the mainframe operation. Cannavino is unusual for a top IBM executive: He never graduated from college, and his scrappy, street-smart personality is at odds with the white-bread background of most IBMers.

Cannavino may have another edge in the race for president. He was handpicked for his current job by his predecessor, Richard T. Gerstner, the new CEO's brother. That Gerstner contracted Lyme disease in 1989 and is now working as a consultant for IBM in Somers, N.Y., IBM sources say. Other IBMers in the running for No.2 include Robert J. LaBant, head of North American marketing, mainframe head Nicholas M. Donofrio, and international honcho Ned C. Lautenbach. Ellen M. Hancock, IBM's most senior female executive and chief of IBM's critical networking unit, is another possibility. "I would put pretty good odds on Ellen Hancock," says one IBM executive. "It would certainly send a message."

Another way to send a message would be to skip insiders altogether and recruit more new blood. "They can't just get a new head and leave the same arms, spleen, and fingers," says former IBMer G. Glenn Henry, now senior vice-president of Dell Computer Corp. Charles Morris, co-author with Charles Ferguson of Computer Wars, a book detailing the decline of IBM, figures that now that the precedent has been set with Gerstner, it will be far easier to recruit outsiders. The next one on the list could well be a new chief financial officer to replace Paul Rizzo, who has been filling the post since the January retirement of Frank A. Metz Jr. One candidate: RJR's CFO Karl M. von der Heyden.

Still, the prospect of a CEO with no computer-industry experience did not sit well with some investors. IBM's stock dropped three points on Mar. 24, the day the news of Gerstner's appointment hit The Wall Street Journal. One investor, whose institution is among IBM's 10 largest shareholders, says: "I'd like to see someone with more of a knowledge of technology. I think it's needed there." Says William J. Milton Jr., computer analyst at Brown Brothers Harriman & Co.: "I think it's risky to bring someone in from outside the industry. If a computer firm takes a wrong strategic direction in terms of product, the firm may never recover." He also figures the move could further erode morale. "I expect some exodus of talent from IBM as a result of this," says Milton.

Indeed, news of Gerstner's appointment was viewed with apprehension in some parts of IBM. Philip Van Itallie, a manufacturing-systems engineer at IBM's East Fishkill (N.Y.) plant says the choice was greeted with dismay. "People here were hoping they'd find a computer-literate person, instead of someone with financial concerns only," he says. "It would be good if there was someone who knew about computers and could lead IBM out of this mess. But that is wishful thinking."

Outsiders such as James F. Moore, president of Geopartners Research Inc., a Cambridge (Mass.) consultancy, say Gerstner's first task is to shore up morale. The Fishkill plant, for one, is bracing for layoffs, starting on Mar. 29. "Once inside, he has to simultaneously stop the chaos, focus people on results, and reassure people that the company has a future. The internal message is critical," says Moore.

`JUGULAR ISSUES.' Gerstner seems certain to move fast on those problems. Linda Fayne Levinson, a former colleague of Gerstner's at both McKinsey and AmEx who is now at Creative Artists Agency, says when he takes on an assignment, he's absolutely single-minded. "As a consultant, what was remarkable about him was he truly could identify the jugular issues that the client should be focusing on, and he never got sidetracked by nonsense issues."

Gerstner boasts of his affinity for hard work, hard decisions, and risk. On his move to RJR, he said: "The idea of going into an already well-run company and taking the helm and steering it a few degrees to the right or the left--that doesn't have the challenge of this." Once at RJR, he worked 6 1/2-day weeks--and loved it. "I'm having a terrific time," he said then. He recalled being home one Sunday afternoon and saying to his wife, Robin: "I really can't wait to get to the office tomorrow." If his years at RJR had dampened Gerstner's enthusiasm, his new job will make life interesting again.

      From interviews with BUSINESS WEEK since taking the helm at RJR 
      COST-CUTTING "I gave an award to a guy at American Express who bought a used 
      MANAGEMENT "I think you should decentralize every [operation] you can...and 
      the burden of proof should always be on those who want to centralize."
      DECISION-MAKING "Once I have a feeling for the choices, then I have no 
      problems with the decisions. I love to make strategic decisions."
      WORK "One Sunday afternoon I turned to my wife and said: `I really can't wait 
      to get to the office tomorrow.' "