Who Says Elephants Can't Dance?: Leading a Great Enterprise through Dramatic Change (3 page)

“The answer to both questions may be no.”

And, said the usually sober
Economist
, “IBM’s humiliation is already being viewed by some as a defeat for America.”

The Decision

The turning point in my thinking occurred over Presidents’ Day weekend in February 1993. I was at my house in Florida, where I love to walk the beach, clearing and settling my mind. It’s very therapeutic for me. During an hour’s walk each day that weekend, I realized that I had to think differently about the IBM situation. What prompted my change of heart was what was happening at RJR

Nabisco. As I noted in the Introduction, it had become clear that KKR

had given up on making its leveraged buyout work as planned.

There were two reasons for this. First, as discussed in Bryan Burroughs and John Helyar’s book
Barbarians at the Gate
, in the fury and madness of the bidding process in 1988, KKR overpaid for RJR

Nabisco. This meant that despite achieving all of the restructuring objectives of the LBO, there simply wasn’t enough operating leverage to produce the projected returns. Second, the operating returns from the tobacco business were under pressure as a result of a price war started by Philip Morris soon after

14 / LOUIS V. GERSTNER, JR.

the RJR Nabisco buy out. Philip Morris was simply following the advice of Ray Kroc, founder of McDonald’s, who’d once said, “When you see your competitor drowning, grab a fire hose and put it in his mouth.”

KKR obviously was working on an exit strategy. As I walked the beach that February, I decided I should be doing the same thing.

And so, as much as anything else, the view that I would not be at RJR Nabisco too much longer was what got me thinking more about the IBM proposal.

I called Vernon Jordan, the Washington attorney who was a longtime friend as well as a director of RJR Nabisco, and asked his advice. He confirmed my feeling that KKR was ready to move out of RJR Nabisco and that this phase of the company’s tumultuous life was coming to an end. Also, it was clear that Jim Burke had already talked with Vernon, because Vernon knew I was on the IBM list. His advice was, as usual, to the point. He said, “IBM is the job you have been in training for since you left Harvard Business School. Go for it!”

I suppose there was a second reason I changed my mind. I have always been drawn to a challenge. The IBM proposition was daunting and almost frightening, but it was also intriguing. The same was true of RJR Nabisco when I’d joined it in 1989. I think it is fair to say that from February 15 on, I was prepared to consider taking on IBM

and its problems. Vernon got word to Jim Burke that I might be in play after all. I began to organize my questions and concerns for Burke and his committee.

When Burke called later that week, I told him that I would take a look at the IBM job. I told him I would need a lot more information, particularly about the company’s short- and intermediate-term prospects. The dire predictions of the media and the pundits had me worried. I had learned a hard lesson at RJR Nabisco: A company facing too many challenges can run out of cash very quickly.

I told Burke that I wanted to meet with Paul Rizzo. Paul had been an executive at IBM in the 1980s. I had met him on several occa WHO SAYS ELEPHANTS CAN’T DANCE? / 15

sions and admired him greatly. He had retired from IBM in 1987 but had been called back by the IBM Board of Directors in December 1992 to work with John Akers to stem the decline of the company.

I told Burke during that February phone call that I wanted to go over the budget and plans for 1993 and 1994 with Rizzo.

Jim moved quickly, and on February 24, at the Park Hyatt hotel in Washington, D.C., where I was attending a meeting of The Business Council, I broke away for an hour and a half to meet secretly with Paul in my hotel room. He had brought me the current financials and budgets for the company.

The discussion that ensued was very sobering. IBM’s sales and profits were declining at an alarming rate. More important, its cash position was getting scary. We went over each product line. A lot of the information was difficult to evaluate. However, Paul clearly underscored the make-or-break issue for the company: He said that mainframe revenue had dropped from $13 billion in 1990 to a projection of less than $7 billion in 1993, and if it did not level off in the next year or so, all would be lost. He also confirmed that the reports in the press about IBM pursuing a strategy of breaking up the company into independent operating units was true. I thanked Paul for his honesty and insight and promised to treat the material with total confidentiality.

When he left the room, I was convinced that, on the basis of those documents, the odds were no better than one in five that IBM could be saved and that I should never take the position. A consumer products company has long-term brands that go on forever. However, that was clearly not the case in a technology company in the 1990s. There, a product could be born, rise, succeed wildly, crash, disappear, and be forgotten all within a few years. When I woke up the next morning, I was convinced IBM was not in my future. The company was slipping rapidly, and whether that decline could be arrested in time—by anyone—was at issue.

Still, Jim Burke would not give up. His persistence may have 16 / LOUIS V. GERSTNER, JR.

had more to do with a growing desperation to get anyone to take this job than it did with a particular conviction that I was the right candidate. I wondered at this point if he was just trying to keep a warm body in play.

Two weeks later I was back in Florida for a brief vacation. Burke and Murphy insisted on a meeting to pursue the issue one last time.

We met in a new house that headhunter Gerry Roche and his wife had just built in a community near my own. Roche only played the role of host. In his new living room, it was Burke, Murphy, and me alone. I remember that it was a long afternoon.

Burke introduced the most novel recruitment argument I have ever heard: “You owe it to America to take the job.” He said IBM

was such a national treasure that it was my obligation to fix it.

I responded that what he said might be true only if I felt confident I could do it. However, I remained convinced the job was not doable—at least not by me.

Burke persisted. He said he was going to have President Bill Clinton call me and tell me that I had to take the job.

Tom Murphy, who tended to let Burke do most of the talking in our previous meetings, spoke up more frequently this time. Murph, as he is called by his friends, was quite persuasive in arguing that my track record as a change agent (his term) was exactly what IBM

needed and that he believed there was a reasonable chance that, with the right leadership, the company could be saved. He reiterated what I’d heard from Burke, and even Paul Rizzo. The company didn’t lack for smart, talented people. Its problems weren’t fundamentally technical in nature. It had file drawers full of winning strategies. Yet, the company was frozen in place. What it needed was someone to grab hold of it and shake it back into action. The point Murphy came back to again and again was that the challenge for the next leader would begin with driving the kind of strategic and cultural change that had characterized a lot of what I’d done at American Express and RJR.

WHO SAYS ELEPHANTS CAN’T DANCE? / 17

At the end of that long afternoon, I was prepared to make the most important career decision of my life. I said yes. In retrospect, it’s almost hard for me to remember why. I suppose it was some of Jim Burke’s patriotism and some of Tom Murphy’s arguments playing to my gluttony for world-class challenges. At any rate, we shook hands and agreed to work out a financial package and announcement.

In hindsight, it’s interesting that both Burke and Murphy were operating under the assumption provided by the management of IBM that a strategy of breaking up the company into independent units was the right one to pursue. What would they have said if they realized that not only was the company in financial trouble and had lost touch with its customers, but that it was also barreling toward a strategy of disaster?

I drove home that afternoon and told my family of my decision.

As usual in my wonderful family, I got a mixed reaction. One of my children said, “Yes, go for it, Dad!” The other, more conservative child thought I had lost my mind. My wife, who had been quite wary of the idea originally, supported my decision and was excited about it.

2

The Announcement

O
ver the next ten days we worked out an employment contract. Doing so was not easy, for several reasons. The big one was the fact that RJR Nabisco was an LBO, and in an LBO the CEO is expected to align himself or herself with the owners and have a large equity position in his or her company. Consequently, at RJR

Nabisco I owned 2.4 million shares and had options for 2.6 million more. In IBM, stock ownership was a
de minimus
part of executive compensation. The IBM board and human resources (HR) bureaucracy apparently did not share the view that managers should have a significant stake in the company. This was my first taste of the extraordinary insularity of IBM.

Somehow we worked everything out, and my next task was to tell KKR and the RJR board of my decision. That weekend, March 20-21, was the annual Nabisco Dinah Shore Golf Tournament. Nabisco invited all of its major customers to the event, and it was important for me to attend. I also knew that Henry Kravis, one of KKR’s senior partners, would be there, and I decided that I would discuss my decision with him then. My name had already surfaced in the media as a candidate for the IBM job, and I knew that KKR and the RJR board were nervous. In meetings with KKR over the preceding weeks, there WHO SAYS ELEPHANTS CAN’T DANCE? / 19

was a noticeable tension in the air. So, on Sunday, March 21, in my hotel room at the Dinah Shore tournament, I told Henry Kravis I was going to accept the IBM job. He was not happy, but true to form, he was polite and calm. He tried to talk me out of my decision, but I was firm that there was no going back. While we never discussed it, what was implicit in that conversation was the knowledge we shared that both of us were working on our exits from RJR. I just happened to finish sooner. (KKR started its exit a year later.) The next day, Monday, I returned from California for the beginning of a very eventful week. The IBM board was meeting a week later. It became obvious that the search committee had begun to shut down its operations—because, one by one, the other rumored candidates for the IBM job started to announce or to leak to the media that they were not interested in the job. On Wednesday
The Wall
Street Journal
reported that I was the only candidate; the next day, so did every other major business publication. It was time to get this whole ordeal over with. Burke and I agreed to announce on that Friday, March 26. That set off a mad scramble to organize both internal and external messages in the midst of a firestorm of leaks and headlines.

IBM made the announcement on Friday morning (even though the cover story of
Business Week
, published that morning, already stated I had taken the job). A press conference began at 9:30 A.M. at the Hilton hotel in New York City. John Akers, Jim Burke, and I spoke. Burke wanted to explain the search process that had seemed so public and disjointed for three months. He made these comments during his opening statement: “There was only a handful of people in the world who were capable of handling this job. I want you to know that Lou Gerstner was on that original list, but we then did a worldwide search of well over one hundred twenty-five names, which we processed and kept reducing…and pretty well got back to the list that we started with. We gave those people on the list code names in an attempt to keep it out of the press—a vain attempt, I might add. You might be

20 / LOUIS V. GERSTNER, JR.

interested that Lou Gerstner was the first person I talked to on that list and consequently had the code name ‘Able.’ I knew all the other candidates—and I knew them all well. There isn’t another candidate that could do this job any better than Lou Gerstner will. We made one specific offer for this job and only one, and that was to Louis Gerstner. While many people felt that technology was the key to this, there’s a list of the specifications that we as a committee put together from the beginning. The fact is, there are fifteen things on the list and only one statement of the fifteen: ‘Information and high-technology industry experience [are] highly desirable, but not opposed to considering extraordinary business leaders.’ All of the others list qualities which are inherent in Lou Gerstner.”

I knew my life was changing forever when I walked to the podium and three dozen photographers surged forward, and I had to conduct an entire press conference through nonstop, blinding camera flashes.

As visible as American Express and RJR had been, this was something altogether different. I was now a public figure. This wasn’t just any company—even any very big company. IBM was an institution—a global one—and its every move was scrutinized by the outside world. I was taking on a daunting challenge, and I’d be doing it in a fishbowl.

I am by nature a private person and, to be frank, I don’t enjoy dealing with the press. On top of that, I looked around the industry, and as far as the eye could see there were (and still are) senior executives seeking the highest personal profile they could manage. I felt then, and I feel today, that while that kind of relentless publicity seeking generates a lot of coverage, and may even help the company in the short run, in the long run it damages corporate reputation and customer trust.

So I faced the cameras and lights that morning with mixed emo-tions. I was as full of adrenaline as I had ever been in my life. At the same time, I knew this was the big show and there was no escaping it.

WHO SAYS ELEPHANTS CAN’T DANCE? / 21

My own remarks were brief. I was just trying to get through the ordeal without dealing with a lot of specific questions about why I felt I was qualified for the job and what I was going to do to fix IBM.