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IBM reportedly puts PC business on the market

Big Blue, which first moved PCs out of the hobby shop and into the consumer mainstream, has put the business up for sale.

IBM, whose first PC in 1981 moved personal computing out of the hobby shop and into the corporate and consumer mainstream, has put the business up for sale, people close to the negotiations said Thursday.

While IBM long ago ceded the lead in the personal computer market to Dell and Hewlett-Packard so it could focus instead on the more lucrative corporate server and computer services business, a sale would nonetheless bring the end of an era in an industry that it helped invent. The sale, likely to be in the $1 billion to $2 billion range, is expected to include the entire range of desktop, laptop and notebook computers made by IBM.

The retreat from the business may be the ultimate acknowledgement that the personal computer has become a staple of everyday life, a commodity product, yielding very slim profits. The companies that make the most money from PCs these days are Microsoft and Intel, whose software and chips are the standard for most of the personal computers sold, regardless of the maker.

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According to the people close to the negotiations, IBM is in serious discussions with Lenovo, China's largest maker of personal computers, and at least one other potential buyer for the unit. Lenovo was formerly known as Legend.

"IBM has a policy of not confirming or denying rumors," a spokesman for IBM, Edward Barbini, said Thursday night.

If IBM's personal computer business ends up being sold to Lenovo, it would continue the migration of high-technology manufacturing to China and Taiwan.

In the 23 years since IBM lent its prowess in mainframe computers to the production of desktop machines, it has been widely criticized for having destined the machines to commodity status by giving Microsoft and Intel the rights to those essential standards. And although Apple Computer holds less than 4 percent of the personal computing market worldwide, it has been able to command relatively high prices and richer profits because it has controlled the software and hardware that goes into its machines.

Breaking with tradition
A sale of the personal computer business would be a step away from IBM's traditional emphasis on the size of its revenue as a measure of its corporate power. The PC business represents about 12 percent of IBM's annual revenue of $92 billion.

For nearly a decade, though, some industry analysts have urged IBM to get out of that business as it made only a modest profit or lost money. For this year, analysts have expected a pretax profit of less than $100 million.

IBM executives long resisted that course, arguing that personal computers were technology products its corporate customers wanted. It held on to the business on the theory that it helped hold on to customers.

But in the most recent quarter, IBM ranked a distant third in worldwide PC sales, with 5.6 percent of the market, according to Gartner, the market research firm. Dell was the leader with 16.8 percent of the world market, and HP, which has absorbed Compaq Computer, had 15 percent.

A sale now, if it happens, would be consistent with the strategy pursued by Sam Palmisano, who became IBM's chief executive early in 2002. He has sold hardware businesses where profits were slender and growth prospects were limited, like its hard disk drive business, which was sold to Hitachi.

Instead, Palmisano has bet on expanding the company's services business, automating a full array of operations - from product design to sales-order processing - for corporate customers. IBM now casts itself as a company that does not simply sell technology but serves as a consulting partner to help its customers use technology to increase the efficiency and competitiveness of their businesses. As part of that strategy, he bought PricewaterhouseCoopers Consulting for $3.5 billion, in a deal that closed in October 2002.

"Palmisano's getting out of businesses that aren't growth opportunities and concentrating on what IBM does best," said Mark Stahlman, an analyst at Carris & Company. "PCs are not where the growth is."

To trim costs, IBM has steadily retreated from the manufacture of its PCs. In January 2002, it sold its desktop PC manufacturing operations in the Untied States and Europe to Sanmina-SCI, based in San Jose, Calif. IBM now confines its role in PCs to design and product development out of its offices in Raleigh, N.C., with all the IBM-brand desktop or notebook computers made by contract manufacturers around the world.

More consolidation ahead?
Leslie Fiering, a research vice president at Gartner, has predicted consolidation in the PC industry over the next few years.

"Exiting the market may be the only logical choice for global vendors bleeding profits and struggling for share," she wrote in a recent research report. And she noted that HP, a broad-based technology company where PCs are only part of a much larger business, might face pressures similar to IBM's.

"The PC divisions of HP and IBM" Fiering wrote, "are vulnerable to being spun off if their drag on margins and profitability are deemed too great by their parent companies."

In the meantime, she said, Asian vendors like Lenovo "appear well positioned to leverage their strong local-market standing and low-cost operating models into a global presence."

Asia has increasingly become a major hub for technology manufacturing. More and more chip making is done in the contract factories, like Taiwan Semiconductor, and at new foundries in China.

Still, in the semiconductor industry, Intel and IBM still have big factories in the United States, and Advanced Micro Devices, Intel's most prominent rival in chipmaking, has a leading-edge plant in Germany.

Personal computer making has followed the same path to Asia, especially in the case of notebook machines made in China and Taiwan. Lenovo has had long ties with IBM. It got its start in 1984 as a distributor of personal computers from IBM and AST, the Taiwan PC maker.

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