BIG BLUE BITES BACK

By John Greenwald

Can IBM ever be cool? until last week, the evidence was slim. Yes, company chairman Louis Gerstner urged employees when he arrived two years ago to dispense with formality and send him their thoughts via E-mail. Then he instituted a dress-down policy and had IBM take out 50,000 subscriptions to Wired magazine, the chronicler of online culture. This year he paid for irreverent TV spots, including one showing one Czech nun telling another that IBM's OS/2 Warp software "sounds pretty hot."

But last week Gerstner, 53, proved his company was really serious about getting with it: he moved to seize control of Lotus Development Corp. and its Notes software program, one of the fastest-growing parts of the $100 billion desktop-computing industry. In an unprecedented step for Big Blue, Gerstner launched a hostile bid to acquire Lotus for $3.3 billion, or $60 a share, more than twice the price at which the stock had been trading. At the same time, IBM went to court to challenge a Lotus "poison pill" that would make a takeover prohibitively expensive and appealed to Lotus shareholders to oust the firm's board of directors. "Call this IBM unleashed," says Marc Schulman, president of Technology Strategies Group, a Connecticut firm that consults with computer companies. "The whole mind-set of the company has changed."

IBM would put its worldwide sales force and $7 billion in cash behind Notes, which dominates the market for so-called groupware and which, experts say, represents the next big advance in personal computing. By using Notes, teams of workers in different offices-or even different countries-can call the same documents to their computer screens and work on them together. Lotus commands fully 65% of all sales of groupware, which total about $500 million at present and are expected to balloon to $5 billion a year by the end of the decade. "Today, Notes is the only game in town," says Carter Lusher, a research director at the Gartner Group, which tracks the computer industry.

That would give Gerstner an ideal weapon for challenging industry giant Microsoft, which dominates most other parts of the desktop software business. Not only would IBM reap increasing revenues from sales of Notes, but other software companies could use it as a "platform" on which to build their own programs and thereby turn it into a global standard. "In this industry he who is first garners an enormous amount of benefit," Gerstner says. But Microsoft chairman Bill Gates, who plans to roll out a groupware program called Exchange later this year, dismissed the IBM-Lotus alliance. "I just don't think hardware companies can manage software companies," he told the Wall Street Journal.

The biggest skeptic was Lotus chairman Jim Manzi, 43, who had spurned an IBM merger offer in January and learned of the takeover attempt in a phone call from Gerstner at 8:25 a.m. last Monday, five minutes before IBM went public. Manzi swiftly hired investment banker Lazard Freres to plot defense tactics and search for a white knight, such as AT&T or Hewlett-Packard, that would rescue Lotus. No savior had appeared by week's end, however, and Manzi seemed resigned to coming to terms with IBM if it would sweeten its offer. Wall Street watchers expected IBM to do just that to make the deal friendlier.

If it prevails, however, IBM will gain a company that is struggling to hold on to its original niche. The Lotus 1-2-3 spreadsheet was the first blockbuster for PCs but has since been eclipsed by Microsoft's Excel. Lotus fell behind in spreadsheets and other programs, such as word processing and graphics, by being slow to develop software for Microsoft's Windows operating system, which now runs 90% of the world's desktop computers. Although programs like spreadsheets accounted for two-thirds of Lotus revenues of $971 million last year (Notes and other communications software made up the rest), declining sales led to losses of more than $20 million for the company in 1994 and $17.5 million in the first quarter of this year.

Among the big challenges for IBM will be to maintain the allegiance of crucial talent like Ray Ozzie, the creator of Notes, who spent 10 years developing the software. "The downside of IBM is that it takes 42 people to make a decision," says Mitchell Kapor, the founder of Lotus, who now is an adjunct professor at M.I.T. "If that happens, Ray will throw up his hands." Gerstner tries to sound reassuring. "We certainly don't want to suck Lotus into the giant company that IBM is and destroy what makes it so successful and unique," he says. "They can run their daily lives the way they've always done it."

Gerstner originally resisted making a hostile bid during six months of previous negotiations. "When we found out that Lotus did not want to be acquired, our initial reaction was, well that's that." In the end Gerstner decided that the hostile offer was "in effect the only way we could get it [a merger] started." Such are the challenges of romance when the square falls for someone cool.

--Reported by Sam Allis/Boston and Barbara Rudolph/New York

With reporting by SAM ALLIS/BOSTON AND BARBARA RUDOLPH/NEW YORK