Lotus: `No One Knows Who's In Charge'

Credit IBM with impeccable timing: Its hostile takeover bid has caught Lotus Development Corp. at a particularly vulnerable moment. A stunning $18 million first-quarter loss--its first in years--has sent Lotus reeling. Top managers are feuding, and with layoffs looming, employee morale is in the dumps. It's "like a soap opera," says a former executive.

On May 15, a powerful outside director, former Citicorp President Richard S. Braddock, took over an office at Lotus' headquarters to oversee a major cost-cutting program and corporate reorganization. All of Lotus' four business units now report to Braddock--making unclear, say outsiders, the role of Chief Executive Jim P. Manzi. "It's a battlefield," says one former top executive. "No one's sure who's in charge--Braddock, Manzi, or the business heads."

TURMOIL. Manzi declined to comment. Braddock says "there's no tension" between himself and Manzi, who he says is also overseeing the restructuring. But he admits "there's a certain amount of fragility right now" within Lotus. Indeed, sources familiar with the company say Braddock's arrival has tensions running high among senior managers. Lotus has eliminated 32 high-level positions in the past two weeks, and hundreds of layoffs at lower levels are expected during the next few months.

The turmoil began in January, when the company announced a 50% price cut on a new version of its hot Notes program--well before the software was available. The unusual move temporarily killed demand for Notes, contributing to an 18% first-quarter revenue decline. Lotus' top managers were caught off guard, and its investors more so: Lotus shares, which had traded as high as 85 in March, 1994, fell into the low 30s. Two of Lotus' largest investors told BUSINESS WEEK at the time that they would sell their stakes if offered $50 a share.

Manzi, attempting to restore confidence, announced plans on Apr. 19 to cut costs and reorganize the company. Now, Braddock and Senior Vice-President Robert K. Weiler insist things are going as well as can be expected. But Lotus employees are rattled, and there are those among the rank and file who are sympathetic to a takeover by IBM. "To lots of employees, [the bid] is manna from heaven," says Stephen J. Crummey, a former Lotus sales chief.

One of those who is pleased at the prospect may be the single Lotus employee IBM would want most to keep happy--Notes inventor and architect Ray Ozzie. Ozzie already has indicated he would welcome Big Blue's deep pockets, say associates of the developer. Ozzie has not been happy about the pace at which Lotus has expanded demand for Notes, these sources say.

LOTUS-EATERS. Another IBM sympathizer: Mitchell D. Kapor, Lotus' founder. Kapor has been gone from the software maker for nine years. But as a computer-industry elder who once bore a practiced disdain for IBM and its ways, his support of Big Blue's bid comes as a surprise. "Something decisive had to happen," Kapor says. He calls IBM's offer a "good deal" that management probably should accept.

That feeling isn't universal. Many employees, accustomed to Lotus' relatively freewheeling culture, remain extremely wary of IBM's bureaucracy--and its dismal track record in personal-computer software. Until IBM offers very favorable terms to key employees, "the prospect of working for IBM is very unappealing," says Tim Davenport, a Notes manager who left Lotus May 19.

Manzi clearly concurs. He likely would not be kept on by IBM and is showing signs he'll fight the takeover. On the other hand, Manzi stands to earn a windfall of at least $73 million on his stock if the deal goes through. He also would be extricated from the latest and most difficult in Lotus' long string of crises. Given his choices, he may opt not to oppose IBM's offer for long.

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