IBM puts PC business up for sale

IBM, the company that invented the PC, has put its PC business up for sale, according to the New York Times, and is in...

IBM, the company that invented the PC, has put its PC business up for sale, according to the New York Times, and is in discussions with China's largest maker of personal computers, Lenovo Group (formerly Legend Group), and at least one other potential buyer.

An IBM spokeswoman refused to comment on the story, as did a spokeswoman for Lenovo in Hong Kong.

A sale would take IBM out of the home computing market it popularised with its 1981 release of the IBM Personal Computer. Hardware was the foundation of IBM's business until Lou Gerstner arrived as chief executive in 1993 and revived its fading fortunes with a shift to software development and services work. Since 1998, IBM's software and services have eclipsed hardware in revenue generation.

IBM has already pulled back from the commoditising PC market. In 2002 it signed a $5bn (£2.57bn), three-year agreement to outsource most of its desktop PC production to US-based Sanmina-SCI and sold its hard-disc drive business to Hitachi.

But while financial analysts called for IBM to shed its low-margin PC business, executives including chief executive Sam Palmisano resisted, arguing that the company's strength came from its sweeping product portfolio, which gave it end-to-end expertise.

If IBM is to alter that strategy and leave a challenging market, it appears to have timed the move well. In November, Gartner analysts predicted that three of the world's top 10 PC makers would sell their businesses or pull out of the market by 2007 because of slower growth rates and falling profit margins. It cited the PC divisions at IBM and Hewlett-Packard as vulnerable to being spun off.

"We forecast at least three lean years for the global PC market after 2005," reported Gartner. "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 rate IBM as the third biggest PC maker by unit shipments. Leading the pack is Dell, the only consistently profitable PC supplier over the last few years. HP is number two.

"IBM likes to be number one and sometimes number two in a business. They don't like number three very much," noted analyst Rick Doherty of The Envisioneering Group. 

Doherty said that Palmisano has promised to monitor IBM's business units and fix or get rid of any that didn't fit into IBM's strategy of only competing in markets where it can dominate or innovate. 

Leaving the PC market would fit into that overall corporate strategy. And IBM has manufacturing ties to Lenovo and other Chinese companies that go back years.

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

He predicted that if IBM did leave the PC business, it would - as IBM's executives had argued - suffer some customer resistance to its diminished portfolio. "There are some performance expectations," he said. "If you want to recommend a consumer laptop today, nobody beats IBM, in any geography."

Merrill Lynch 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," he said.

After several rocky years and substantial restructuring, IBM's personal systems group, which include its PC business, has shown strong year-on-year sales growth for each of the first three quarters of this year.

Sam Bhavnani of Current Analysis cited those gains as support for his view that IBM would be foolish to sell its PC group. He said IBM's ThinkPads were considered to be among the most well-designed notebooks available, and customers appreciated the company's advances in security and other high end features.

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

"Selling the business really doesn't make sense," he said. "While the PC business is not a huge profit centre for IBM, it's not something that's absolutely dragging it down, either. Customers want the IBM brand."

Paul Kallender and Stacy Cowley write for IDG News Service

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