IBM: A New CEO for Its 100th Birthday?

On June 16, IBM (IBM) will mark its centennial. Five weeks later comes a birthday that could be more significant for Big Blue's future: Chief Executive Officer Sam Palmisano turns 60, the age by which IBM CEOs have traditionally named their successors. Who Palmisano ultimately taps to lead the tech giant could go a long way toward determining how much IBM continues the cost-cutting that has marked its recent past or launches into a new era of growth.

On the surface, executive transition shouldn't be traumatic for Big Blue. While Hewlett-Packard (HPQ) and Nokia (NOK) have recently had to look outside their ranks to recruit CEOs, IBM has several qualified internal candidates for the job. Sales chief Virginia "Ginni" Rometty and services head Mike Daniels, both senior vice-presidents, are considered the top contenders to follow Palmisano. (A third candidate, hardware chief Rodney C. Adkins, is considered a long shot by analysts.) "They've mastered the art of developing the next generation," says Dennis Carey, vice-chairman at executive recruiter Korn/Ferry International (KFY), which has done work for IBM. "Now they have the problem of riches, as opposed to the problem of poverty."

Rometty, 53, runs IBM's sales operations and previously led services, which has become the company's most important business. A 30-year IBM veteran, she caught Palmisano's eye helping to integrate PricewaterhouseCoopers (PwC), a $3.9 billion acquisition that allowed the company to offer strategic advice. That, in turn, enabled IBM to forge closer ties to customers' CEOs. If chosen, Rometty would be the company's first female chief executive. She'd also make IBM the largest company with a woman at the helm, surpassing PepsiCo (PEP), headed by Indra Nooyi.

"I don't think it's a race," says John Swainson, who spent 26 years at IBM and is now a senior adviser at Silver Lake Partners. "If they were going to choose someone now to be Sam's replacement, she'd be the logical choice." Swainson says overseeing sales is particularly significant. "That, historically at IBM, has been the big job before running the whole company," he says. Palmisano took over sales when he was named president in 2000 and succeeded Louis Gerstner two years later.

After the PwC acquisition, Rometty helped retain its consultants by shielding them from some of IBM's cost-cutting. When Palmisano wanted to trim travel budgets by making consultants stay at economy hotels like Holiday Inns, she helped them fight the move—and win—says Milestone Partners' Ric Andersen, then a PwC consultant. "She knows how to interact with him," he says. "Sam can crush people. He's a very fiery, driven kind of guy. She knows there are times to take on battles and times to not."

Daniels, 56, joined IBM straight out of college. His trajectory is similar to Rometty's, with experience in sales and services, plus a key posting in Tokyo. He now runs all of services, where he's responsible for about 60 percent of IBM's total revenue. He's known as an affable manager, with a less intense personality than Rometty or Palmisano. "He just gets business done, without a lot of fireworks," says Frank Gens, an analyst at research firm IDC.

Daniels in recent years has made his mark as a cost-cutter, helping boost IBM's margins. In 2005, when Palmisano split the services business into consulting and technology units, Daniels at first took over only the latter. He fired thousands of people and offshored jobs to lower-cost regions such as India to trim expenses and boost profits. The moves helped IBM thrive against rivals. Still, some workers resent his decisions. "We really feel like we're treated like a number," says Tom Midgley, president of Alliance@IBM, an employee group that's tried to unionize IBM's workers.

Who ends up succeeding Palmisano may well depend on what the board decides are the top priorities going forward. Palmisano steadily transformed IBM from the world's largest computer maker into a services and software company. He sold off the PC business in 2005 and made $25 billion in acquisitions. That rendered the company reliably profitable but also a slow-growth operation. While rising earnings have pushed IBM's stock to an all-time high, its sales growth over the past nine years has been only half that of HP and Oracle (ORCL).

Whether IBM's board decides that faster growth is the priority for the second half of the decade (a financial strategy is already mapped out through 2015) or that a seasoned cost-cutter is needed to keep profits steady, directors aren't eager to lose either Rometty or Daniels. The board has approved hefty incentive packages for both—as long as they stay put for another three years.

The bottom line: Palmisano's choice of a successor will help determine whether IBM continues to focus on costs or tries to move in a new direction.

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