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IBM dropping Inacom ties in wake of Compaq deal

Ripple effects from Compaq's acquisition of the distribution wing of Inacom are spreading, as IBM says it would terminate the bulk of its multimillion-dollar relationship with the distributor.

    Ripple effects from Compaq's acquisition of the distribution wing of Inacom are spreading, as IBM today said it would terminate the bulk of its multimillion-dollar relationship with the distributor.

    The move eliminates one of the uncomfortable tangents of Compaq's $370 million acquisition earlier this week. By buying Inacom's distribution division--which ships billions worth of computer equipment from manufacturers to customers annually--Compaq effectively was in line to become a lead distributor of Big Blue and Hewlett-Packard products. As a distributor, Compaq would have been privy to competitive information it ordinarily wouldn't get.

    "It should come as no surprise that we are not going to authorize Compaq as a distributor of IBM product," said Jon Judge, general manager of worldwide sales and service for IBM's Personal System Group.

    Prior to the Compaq sale, Inacom's relationship with IBM was fairly extensive. Not only did Inacom distribute IBM products, it built and configured IBM PCs and provided services to Big Blue customers.

    Inacom's stock rose to 9 on the day the Compaq deal was announced but has dropped back to 6.06. Inacom executives during a conference call about the deal said it would reduce earnings.

    The pact between Compaq and Inacom is largely a marriage of convenience. Compaq wants to start selling more PCs directly and needs the distribution and logistics systems that Inacom will give them. By contrast, Inacom, like a number of other distributors, has been struggling with thin margins.

    IBM plans to terminate the last three relationships effective when Inacom completes the facilities sales to Compaq, perhaps as soon as 45 days.

    "We will transition our relationship to Inacom appropriate to the new business model they have put themselves in," Judge said. IBM will reduce Inacom to a second-tier distributor that must buy products through another wholesaler.

    The "co-location" relationship between IBM and Inacom, where a distributor rents space in a PC maker's manufacturing facility in order to build computers, will be potentially the most difficult relationship to sever. Gates-Arrow, MicroAge and Pinacor are among the other distributors with co-location operations with IBM.

    This is not the first time a Compaq acquisition has disrupted long-standing relationships. After Compaq announced it was buying Digital Equipment Corporation, Dell Computer found itself seeking a new partner to provide on-site services and consulting. Digital was on of Dell's primary field partners.

    IBM is not the only Compaq competitor whose systems are distributed by Inacom. Others include Dell and HP, and they may follow IBM's lead.

    "We obviously were disappointed when we found out that Inacom had sold a large part of its business to one of our biggest competitors," Judge said. With that, our first concern is our customers and to make sure they are minimally impacted by this decision Inacom and Compaq have made."

    News.com's Michael Kanellos contributed to this report.