ARMONK, N.Y. (
CEO Sam Palmisano may not be a rock-star executive in the mold of
Steve Jobs or
Steve Ballmer, but he has been earning applause for successfully guiding the tech giant through the economic
The Armonk, N.Y.-based firm has been one of the
of the recession. Margins have fattened despite falling revenue, as Palmisano has zeroed in on fertile parts of the company. The 58-year-old, who played backup sax for the Temptations when he was in high school, now is leading the band at IBM.
"When you think of large technology companies and who has navigated the storm best, I think that IBM has got to be at the top of the list," Brian Marshall, an analyst at Broadpoint AmTech, told
. "They have done a great job of executing their business plan."
Inside IBM's Tech Vision
Palmisano, a 36-year IBM veteran who succeeded Lou Gerstner as CEO in 2003, has done a good job of building on his predecessor's work. In the last six years, Palmisano has shifted IBM's focus further from its hardware roots into higher-margin businesses such as services and software.
"They have done a great job of expanding the operating margin," said Marshall, adding that this is expected to grow to 18.5% in 2009 from 16.1% last year. "I think they have the right plan and they are executing very well."
Ron Gruia, principal analyst at Frost & Sullivan, agrees, citing Palmisano's recent crusade to
"In this market, there's a few key elements for success -- one is managing your OPEX aggressively, and he has done that with cost cuts," he told
. "Overall, if you look at IBM throughout his tenure, they have undergone a big transformation -- they became more of a services company."
IBM, which recently
a major IT services deal with Australian airline
, is also one of the world's largest software makers, a designation that has assumed greater importance during Palmisano's reign.
Big Blue has been on a software-buying spree in recent years, most recently
for $1.2 billion. This followed a slew of acquisitions, notably a
and a $2.1 billion
Shrewdly, Palmisano has pursued a "vertical" approach to selling software, according to Gruia, who says that the firm often targets its wares at specific sectors such as the oil and transport industries.
"This means that they can insert themselves at a very high level," he adds, explaining that software also offers a recurring revenue stream.
This approach certainly seems to be paying off. The company recently
its profit forecast for 2009 and 2010, which followed strong
numbers. In its recent second-quarter results, IBM boosted its pre-tax margin by four points, its biggest margin improvement since it sold off its PC business to
in 2005. Despite seeing revenue dip 3% year over year, the firm also expanded its gross margin by two points.
IBM clearly has learned the lessons of the last recession, which followed the dot.com bubble and saw the company take a sales and earnings hit. Big Blue's gross margin had also been declining during the '90s, weighed down by commodity products like PCs, hard-disk drives and printers.
This is where Palmisano's predecessor also deserves credit for the firm's current health, overseeing the sell-off of its hard-disk-drive business in 2002, and starting the company's margin obsession. The current CEO, however, was at the helm for the Lenovo deal, as well the creation of a printer joint venture with
in 2007. Under the terms of the deal, Ricoh acquired an initial 51% of the printer business, which will eventually become its wholly owned subsidiary.
It has not all been plain sailing, though. The Baltimore native has come under fire for his cost-cutting efforts, which have involved
and shifting jobs to lower-cost parts of the world such as India.
"It's part of many a successful company," said Broadpoint AmTech's Marshall. "The sad state of affairs is that you're not going to have an optimal cost structure if you're running everything from the U.S."
IBM, which competes with
raised its dividend
this year, although Marshall feels that some of its competitors may offer more upside to investors.
are worth a look, according to the analyst. "I think there's more opportunities for finding growth at more attractive valuations than IBM," he said.
However, Palmisano is laying the groundwork for future growth. Although he is
on IBM's earnings calls, Palmisano is hard at work elsewhere, recently throwing his weight behind President Obama's
"I think he likes
IBM CFO Mark Loughridge to focus on the investment community, so that he can focus on running the company and meeting with customers, business leaders, and government," he said.
Palmisano may not have scaled the heights of the music industry, but he is certainly earning a big reputation amongst tech's heavy hitters.