Commentary: An easy switch

By John Monroe and Tom Bittman, Gartner Analysts

Hitachi has agreed to purchase IBM's disk-drive operations and form a new company that is majority-owned by Hitachi. The announcement by the two companies wasn't really anything new. It simply puts a monetary figure--$2.05 billion--on the disk-drive deal, initially announced on April 16, which has now become "definitive" rather than "proposed."

	See news story: IBM plans $2.5 billion charge, layoffs

Hitachi did name a few key executives, including CEO Jun Naruse, formerly of Hitachi Data Systems, who should prove to be a wise choice to head the new disk-drive company. It also discussed plans to form within its technology group a new business unit focused on electronics-design services to provide customers with high-level technology design and integration services.

Gartner believes that IBM will continue to cast a cold eye on all of its multifaceted business units. Any business unit that does not contribute strategically and lucratively to a global software, systems and services business model will likely become a candidate for divestiture or write-off.

IBM's divestiture of the hard-drive unit, along with layoffs and the subsequent $2 billion or more in pretax charges, appears to be an attempt to maximize one-time charges so that profits in the near future can be greater and come more quickly.

Hitachi's $2.05 billion payment for the division will come as a large, undisclosed initial lump sum when the new company is formed (probably in December), along with lesser payments over three years (as a buyout of IBM's minority 30 percent ownership of the new disk-drive joint venture). For IBM, this money can become sheer profit subsequent to the one-time charges. In addition, a huge amount of overhead will be cut as a result of the divestiture (18,000 employees, plus hundreds of millions of dollars in annual R&D and facility upkeep).

The success or failure of the new joint-venture company will depend almost entirely on adequate funding for R&D, time-to-market execution and symbiotic cooperation. An efficient consolidation of people and facilities located throughout the world, coordinated from a central headquarters in San Jose, Calif., will likely be a daunting task. Geographic and cultural differences will deepen the degree of difficulty in achieving cost-effective integration. However, if this is done right, with adequate funding, reciprocal compromise, daring execution and long-term commitment, the new company could become a much more formidable force in the hard-drive industry and reap considerable profits.

Gartner expects minimal or no disruption of service to either original equipment manufacturers (OEMs) or end-user customers that purchase hard drives or high-end servers and storage systems from Hitachi or IBM. The impact of the collaboration on high-end storage systems will not be apparent until next-generation products are shipped.

Gartner also expects that any features enhanced as a result of the collaboration will be equally available in both Hitachi and IBM storage systems, as well as in Hitachi systems shipped on an OEM basis to Sun Microsystems and Hewlett-Packard.

(For a related commentary on recent Hitachi moves in the storage products arena, see gartner.com.)

Entire contents, Copyright © 2002 Gartner, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.