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Big Blue Sam disses HP, lauds Ellison

IBM's biggest rival? Oracle

The smart choice: opportunity from uncertainty

Who's Big Blue's biggest problem going forward? Oracle. Who's the one IT company that IBM is not too worried about? Hewlett-Packard.

So said Sam Palmisano, IBM's president, chief executive officer, and chairman, in an interview with the Wall Street Journal.

Palmisano rattled on for an hour, giving his normal speech about how globalization is important to Big Blue and complaining a bit about the Obama Administration, which helped prop up IT sales and was Palmisano's best friend forever back in late 2008 and early 2009 when it was clear there would be some serious economic stimulus and that IT vendors - particularly IBM - would profit handsomely from that.

Now, it is the summer of Obama's discontent, and some $30bn in IT projects in the US government have been stalled for review, making it all that much harder for Palmisano to make his numbers.

IBM's top exec also laid to rest any concerns that he would retire next year, on Big Blue's centennial and his own 60th birthday as IBM tradition has held he should. As El Reg correctly anticipated when Big Blue reorganized its executives and groups in July, that reorganization was not about setting up succession for Palmisano, but consolidating and simplifying IBM's operations and hunkering down for the long haul to 2015.

In that reorganization, IBM merged its systems and software units and put them under the control of Steve Mills; re-merged its two services units to re-create the Global Services behemoth under Mike Daniels; put Ginny Rometti in charge of all of IBM's sales, marketing, and strategy; and put chief financial officer Mark Loughridge in charge of enterprise transformation. That latter bit is short-hand for cutting costs through partnering, outsourcing, off-shoring, and otherwise "rebalancing" its workforce (in the IBM lingo), as well as squeezing the company's vast supply chain. All of these executives are in their 50s and are unlikely to take over the top job at Big Blue.

When asked if he was going to retire next year, Palmisano told the WSJ: "I am not going anywhere." Of course, there are at least two interpretations of that phrase.

Back in May, IBM told Wall Street that it would be able to double the company's profits by 2015 to at least $20 per share. Over the next five years, IBM says it can generate $100bn in free cash flow, and will return about $70bn of that to shareholders in the form of share buybacks ($50bn) and dividends ($20bn) and the remaining $30bn for acquisitions, increased R&D, and so forth. The plan is to do around $20bn in acquisitions and to cut $8bn in expenses.

Palmisano doesn't think Hewlett-Packard is much of a threat to his company, and bashed the company's board of directors for its handling of the dismissal of its top exec, Mark Hurd, who has now moved over to Oracle to become its co-president under CEO Larry Ellison. Palmisano said the $35m payoff that Hurd received after he was allowed to step down "is not a good use of shareholder money" and that the whole situation was "not handled in the best interests of shareholders."

It is hard to say if what Palmisano was trying to say was that Hurd should have been fired, and therefore not entitled to his golden parachute, or if they should have never fired Hurd in the first place. Perhaps the WSJ will publish the entire interview so we can all parse out Palmisano's meaning.

Big Sam did admit that Oracle has him a bit worried and that it will be IBM's biggest rival in the IT sector, words that must make Ellison just feel all warm and fuzzy glint like cold steel. Palmisano said that Ellison "has done a very good job" and that Oracle has "cash flow and good margins" and that, unlike HP, it invests in research and development. Palmisano ridiculed HP for spending $2.4bn on storage maker 3PAR, but said HP had no choice because Hurd chopped R&D too far.

Very few HP employees would argue with that sentiment. But then again, Oracle's big and smartest investments have been in acquisitions in adjacent markets like middleware and applications and buying out competitor like in the application, database, and middleware spaces. The situation is nowhere near as simple as Palmisano would have us believe. Ditto for HP does not have a mainframe business that is like selling crack to addicts; printer ink does not throw off as much money as big banks and insurance companies using mainframes. Period.

IBM has some 6,000 to 7,000 mainframe shops absolutely glued to the floor with their vintage mainframe apps and databases and can more or less pick their pockets at will. It just ain't that way in the Unix server racket and is even less so in the x64 server space where HP dominates and Oracle is, like Sun, simply not a player. ®

It's always easier to talk big when you have a monopoly, as IBM does with mainframes and Oracle does with enterprise-grade databases. And Palmisano is right. Oracle is a much bigger threat because companies will switch their entire hardware stack long before they even think of changing their applications and databases. Oracle is a better bet for profits long term than HP for this very reason. And that is an even better reason why IBM should have been smart enough to never let Oracle get ahold of the 35,000-strong Sun customer base.

Who made that decision again? Oh, right . . . . ®

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