Is Lenovo Right for IBM's PC Biz?

IBM's PC business reportedly for sale 


DECEMBER 03, 2004 (IDG NEWS SERVICE) - IBM has put its PC business up for sale, according to a story published today on the Web site of The New York Times.

IBM is discussing selling the business to Lenovo Group Ltd., China's largest maker of PCs, and at least one other potential buyer, according to the article. The price of the sale and the status of the negotiations weren't mentioned.

A spokeswoman for IBM in Japan declined comment on the story, and a spokeswoman for Lenovo in Hong Kong had no immediate comment. A U.S. spokesman for IBM, Clint Roswell, also declined comment.

A sale would take IBM out of the home computing market it popularized with its 1981 release of the IBM Personal Computer. Hardware was the foundation of IBM's business until Lou Gerstner arrived as the company's CEO in 1993 and revived its fading fortunes with a transition to software development and services work. Beginning in 1998, IBM's revenue from software and services eclipsed hardware.

IBM has already pulled back from the commoditizing PC market. In 2002 it signed a $5 billion, three-year agreement to outsource most of its desktop PC production to San Jose-based Sanmina-SCI Corp., and sold its hard disk drive business to Hitachi Ltd. While financial analysts called for IBM to entirely shed its low-margin PC business, executives, including CEO Sam Palmisano, resisted, arguing that IBM's strength comes from its sweeping product portfolio. Retaining a presence in the PC market helps IBM better serve customers seeking end-to-end providers with broad expertise, the company's management said.

If IBM is going to alter that strategy and leave a challenging market, it appears to have timed the move well. In a Nov. 29 report, Gartner Inc. predicted that three of the world's top 10 PC vendors would sell their businesses or pull out of the market by 2007 because of slower growth rates and reduced profit margins. It specifically cited IBM's PC division, along with Hewlett-Packard Co.'s, as vulnerable to being spun off.

"We forecast at least three lean years for the global PC market after 2005," Gartner wrote. "In these years, unit growth will fall below the double-digit rates the market is accustomed to, and revenue growth will come to a virtual standstill."

Research firms Gartner and IDC both place IBM in the No. 3 spot, by unit shipments, among PC makers. Leading the pack is Dell Inc., the only consistently profitable PC vendor over the last several years. HP holds the No. 2 position. IDC pegged IBM's shipments in the second quarter of this year at 3.2 million PCs globally.

"IBM likes to be No. 1 and sometimes No. 2 in a business. They don't like No. 3 very much," said analyst Rick Doherty of The Envisioneering Group.

Palmisano has promised investors he will continually monitor the company's business units and repair or get rid of those that don't fit into IBM's strategy of only competing in markets where it can dominate or innovate, Doherty said. Leaving the PC market would fit that overall corporate strategy. Also, IBM has for years had manufacturing ties to Lenovo and other Chinese companies.

"It's not such a stretch to make their largest partner the owner," he said.

Financial analyst Steve Fortuna, of the Prudential Equity Group LLC, also sees the potential change as a logical one. "We believe that the PC business is absolutely not strategic to (IBM's) long-term core strategy," he wrote today in a research note. "Over time, IBM's strategy has focused more on a services and software push. To the extent that IBM does remain in hardware, they have focused their attention on areas in which they are able to differentiate themselves and add value."

If IBM does leave the PC business, it will -- as IBM's executives previously argued -- suffer some customer resistance to its diminished portfolio, Doherty predicted. Corporate customers appreciate being able to rely on IBM-quality products for all their IT needs, he said.

"There are some performance expectations. If you want to recommend a consumer laptop today, nobody beats IBM, in any geography. You can literally drop a ThinkPad and not lose data on it," Doherty said. "Corporate customers are going to be looking for an assured supply. IBM doesn't want to have to go to CompUSA to buy ThinkPads."

Merrill Lynch & Co. Inc. financial analyst Steven Milunovich also cited risks to IBM's corporate accounts quality control, should it sell its PC unit.

"We think that IBM may still want to distribute an IBM-branded PC. In other words, Lenovo could provide IBM with a PC that says IBM on the front," Milunovich wrote in a report today.

After several rocky years and substantial restructuring, IBM's personal systems group, which includes its PC business, has shown strong year-on-year sales growth for each of the first three quarters of this year. Revenue increased 17% compared to the three-month period a year ago, to $3.3 billion, on strong sales of mobile PCs during the third quarter, the company said in October. Similarly, strong sales of mobile PCs contributed to 16% year-on-year growth for the second quarter and 18% year-on-year growth for the first quarter, the company said previously.

Current Analysis Inc. analyst Sam Bhavnani cited those gains as support for his dissenting view: He believes IBM would be foolish to sell its PC group. IBM's ThinkPads are considered to be among the most well-designed notebooks available, and customers appreciate the company's advances in security and other high end features, he said.

Bhavnani thinks IBM is more likely to deepen its Chinese manufacturing and product development partnerships than it is to exit the PC business entirely.

"To me, [selling the business] really doesn't make sense," he said. "While the PC business is not a huge profit center for IBM, it's not something that's absolutely dragging them down, either. Customers want the IBM brand."