International Business Machines (NYSE:IBM) has stepped up its efforts to rein in its cost by laying off workers across its divisions. IBM posted disappointing Q1 numbers and reported 5% y-o-y decline in revenues to $23 billion. IBM also posted 1% y-o-y decline in net income to $3 billion in Q1. CFO Mark Loughridge had announced that IBM will embark on a “workforce rebalancing” or job cuts. While IBM estimated that rebalancing will cost $1 billion in severance and other charge this year, this cost is meaningfully higher than the $803 million spent on workforce restructuring in 2012. We estimate that the IBM will incur 88 cents per share in cost due to workforce rebalancing. However, we expects that cost saving benefits from this restructuring efforts will materialize in the second half of 2013.
Broad Workforce Reductions
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IBM’s headcount stood at 434,246 employees globally at the end of 2012. People closely following the developments have revealed that 6,500 -8, 000 people could be laid off this year. This translates into a headcount reduction of close to 2% for IBM. While initial reports from the IBM’s Union Labor in U.S. suggest that IBM laid off 2940 workers in North America, IBM plans to lay off 1500 employees in Australia.  Additionally, IBM has eliminated about 128 jobs in Denmark, 250 in Italy and 700 in Germany, among other countries. IBM also plans to lay off employees in Asia Pacific region, India and Latin America.
Jobs Cuts Primarily In Ailing Division
The union claims jobs across some 43 divisions of the IBM have been cut, with the highest job cuts from its system and technology group which includes server, storage and microelectronics division. The system and technology group had reported 17% decline in revenues and an EBT loss of $405 million in Q1.
Considering the job cut figures, we believe that IBM is looking to rebalance its business away from weak businesses and markets where its expects lower returns on investment. Additionally, IBM has stated in its 2015 road map that it is focusing on higher-end integrated systems designed for cloud computing, analytics and big data. Considering the nature of business of these services, these vertical employ less number of personnel albeit with more sophisticated skill set. We, therefore, believe that IBM will continue to cut jobs that can be automated and outsourced to contract workers at its ailing division going ahead.
We currently have a $210 Trefis price estimate for IBM, which is about 7% higher than the current market price.Notes: