From 1 March, Palmisano will succeed Gerstner, who will remain chairman of IBM at least until the end of 2002, the company said. Palmisano, currently IBM's president and chief operating officer (COO), will remain president.
Palmisano, 50, joined IBM in 1973 as a sales representative and has climbed steadily within the company during the past three decades. He became favourite to replace Gerstner when IBM named him its president and COO in September 2000.
"Sam bleeds Blue," Gerstner wrote, in a letter e-mailed to IBM employees and released to the media. "He's an exceptional leader, passionate about our business, committed to our principles and values, and steeped in the disciplines that are critical to our successes."
Gerstner, 59, was widely expected to retire when his contract expires in March. He joined IBM in 1993, and is credited with leading a turnaround that repositioned the lumbering Big Blue in the lucrative professional services business.
Gerstner noted that when he joined the company in 1993, the board "asked me to focus on one short-term objective: save the company. Given my limited knowledge of IBM at the time, I quite honestly did not know if that could be done".
Gerstner succeeded in bringing the company back to profitability, although he had help: "If (chief financial officer Jerry) York had not been with the company, Gerstner would probably have been fired in year two," said Giga Information Group analyst Rob Enderle. "He did the heavy lifting while Gerstner learned the business."
Palmisano has some significant challenges ahead of him, including steering a mammoth company through a slumping market and repairing IBM's money-draining PC business.
"Compared to Dell, which is really the big challenger, IBM moves more slowly and lives on systems that are antiquated. The information the executives get isn't of the same quality," Enderle said.
Enderle doesn't expect Palmisano to make any radical changes at IBM. "I would hope for them, but I don't expect them. That's one of the problems with an internal [candidate]. You have a relationship with many of the people you may have to shoot," he said.
Annex Research president Bob Djurdjevic said he also hoped for a shakeup but did not anticipate one. Gerstner's positive influence on IBM peaked around 1995, Djurdjevic said.
"He was brought in to stop the haemorrhaging. He did that very well. However, since then his challenge has been to generate growth, and in that respect his performance has been pretty dismal," Djurdjevic said.