IBM to merge server, chip groups

The company plans to announce the combined unit in coming days in an effort to improve the company's own chips, CNET News.com has learned.

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Stephen Shankland
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IBM plans to announce in coming days that it will merge its microprocessor and server groups in an effort to improve the company's own chips, CNET News.com has learned.

The combined unit will be called the Systems and Technology Group and will be jointly led by Systems Group chief Bill Zeitler and Technology Group chief John Kelly, sources familiar with the plan said.

IBM is making the change to improve its processors, not to reduce its expenses; there will be no cost reductions or layoffs, one source said.

IBM declined to comment on the plan.

IBM's Systems Group, which is profitable and has 13,000 employees, makes high-powered server computers. The Technology Group, unprofitable and with 17,000 employees, makes processors for IBM and outside customers including Sony, Microsoft, Apple Computer and Qualcomm. The Technology Group also builds custom-made chips called application specific integrated circuits, or ASICs.

Merging the two groups will mean IBM can do a better job applying technology and expertise from outside work to its own Power processors, one source said. Ultimately, IBM hopes the majority of the computing world will move to one of two basic chip designs: Intel's "x86" processors, such as the Pentium or Advanced Micro Devices' Opteron, and IBM's Power processors such as its Power5 coming later this year or the PowerPC 970 used in Apple's G5 and IBM's JS20 blade server.

The move is the latest step in a series of changes at IBM. In the Technology Group, Big Blue sold its hard-drive business to Hitachi in 2002 and laid off hundreds of employees. Meanwhile, the four server units of the Systems Group were unified in 2000, and the storage systems unit was reabsorbed in 2003.

The Technology Group lost $34 million in the last quarter of 2003, though IBM expects it to be profitable in 2004.

One risk the combined unit could pose is that current and potential customers that buy chips built at IBM's East Fishkill, N.Y., fabrication plant may worry that they will be a lower priority than IBM's server group, said Illuminata analyst Jonathan Eunice.

Even though the Technology Group has pared back significantly, "a combined systems and technology group would still represent an absolutely huge purview. I have to wonder if it doesn't glom together too many different kinds of businesses and too many diverse concerns," Eunice added.

The companies that IBM's "microelectronics folks want as customers in order to 'fill the fab' want to see independence. They do not want to see their projects slip because Power5 has taken priority," Eunice said.

Peter Glaskowsky, editor in chief of the Microprocessor Report, thinks the different manufacturing needs can be balanced. "The Systems (Group) only has a certain size business. I think the foundries are capable of handling that plus a certain amount of other work," he said.

IBM's factory is in demand right now. "It's clear that IBM Microelectronics is proving to be one of the best fabs in the world. They're the fab that all the ASIC producers would like to work with if they could afford it," Glaskowsky said.

Separately, IBM cut 300 jobs Tuesday in the server group, company spokesman Jim Larkin said. The cuts came largely from systems development staff.

IBM has about 315,000 employees total.