IBM said to be eyeing a sale of its PC business

IBM, which gave legitimacy to the personal computer business in the 1980s, is said to be negotiating the sale of its PC unit in a move that could reshape the industry.

The company is negotiating with Chinese manufacturer Lenovo Group, formerly known as Legend, and at least one other buyer to sell its PC business unit, according to a report in Friday's New York Times. The unit could fetch as much as $2 billion, the report said.

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IBM spokesman Clint Roswell on Friday said the company's policy is not to comment on rumor or speculation. Representatives at Lenovo were unavailable for comment.

In morning trading, IBM's stock was up 1.28 percent to almost $97.

IBM selling its PC business to Lenovo, which would most likely result in a joint venture of some sort, would make sense for both companies, analysts said. Such a deal would free IBM--which has been moving away from commodity products--from managing a difficult and often money-losing venture, while still giving it access to desktops and notebooks to provide to its customers.

"The PC business is a sort of also-ran, me-too sort of business (for IBM). There are a lot better businesses, including global services and some of the larger computers, that IBM participates in," said Roger Kay, an analyst with IDC. An agreement would "get IBM out of what they think of as a nonstrategic, non-yielding business."

Other analysts said that a joint venture, rather than an outright sale, would make more sense for IBM. "While we believe IBM is seeking to enhance (its PC group's) profits, Big Blue may not elect to sell the entire business and could structure a creative deal in pieces or in terms of distribution," said a research note released Friday by UBS Securities analysts.

The report warned that IBM needs to be wary of the potential to lose sales to corporate users, as competitors may use their PC sales as a means to land the more profitable and large deals that involve servers and software.

Recurring rumors
The fate of IBM's PC business has been a source of recurring speculation for years. Former CEO Lou Gerstner, largely credited with turning the company around in the 1990s by emphasizing computer services, was said to favor a move away from PC hardware. IBM's 1998 annual report included a subsection titled "The PC era is over," leading to widespread speculation that IBM--the company that invented the modern PC industry--intended to sell off its PC operations.

The company later denied that it had plans to completely abandon the PC business. But speculation continued among Wall Street analysts and other company watchers as PC profit margins began to shrink.

Eventually, IBM chose to exit the consumer PC unit almost entirely to focus instead on the corporate audience, where the company's strategy has been to design hardware more technically advanced than competitors' offerings.

Consolidation within the PC industry is inevitable, according to market watchers. As many as three of the top 10 PC manufacturers may be forced out of the global PC market by 2007, according to a report issued earlier this week by market research company Gartner.

Although IBM's PC business attained profitability this year, the company's overall strategy has been to move away from commodity products such as desktop PCs and laptops. Rather than compete with the likes of hardware supplier Dell on price, Palmisano is steering the company toward higher-margin businesses such as consulting services and software.

Palmisano has singled out business process outsourcing--in which IBM takes over some of a customer's functions, such as human resources and finance--as a $500 billion opportunity for the company. IBM has made a number of acquisitions to beef up its process

outsourcing business, including an insurance-claims processing company this week.

"I think IBM has stayed in the PC business in part because some of their large accounts have asked them to. But what's happened in the last couple of years is that Dell has become a well-regarded enterprise vendor," said Mark Stahlman, a financial analyst at Caris & Company. "(IBM) looks at its business as a portfolio, and PCs don't rank very highly."

The PC era: 1981-present
Continued from...

1998
• Intel releases the 450MHz Pentium II.
• Apple ships the iMac.

1999
• The number of people worldwide on the Net passes 201 million.

2000
• Intel releases the 1.5GHz Pentium 4.

2001
• The number of PCs sold worldwide since 1981 hits 835 million.
• Apple's iPod turns on the music.

2002
• Apple unveils flat-panel iMac.
• HP closes book on Compaq merger.

2003
• AMD announces 64-bit Opteron and Athlon 64 processors.
• Dell starts its printer business.
• Intel launches Pentium M and Centrino wireless notebook brand.
• PC shipments rise again, hitting nearly 155 million units for the year, according to IDC.

2004
• Gateway completes eMachines buy.
• Intel kills plans for 4GHz Pentium.

Sources: Microsoft and CNET News.com staff research

Earlier this year, IBM consolidated its chip business with its server hardware group in an effort to improve the design of its processors. Both its chip business and its server business have performed well for the company, unlike IBM's PC unit, Stahlman noted.

Prudential Equity Group analyst Steve Fortuna said IBM is best served by focusing on higher-margin hardware products, such as servers and storage, rather than PCs.

"We believe that the PC business is absolutely not strategic to its long-term core strategy," Fortuna said in a research note on Friday. "To the extent that IBM does remain in hardware, they have focused their attention on areas in which they are able to differentiate themselves and add value."

Crown jewel: ThinkPad
Getting even a piece of IBM's business would give Lenovo--a company currently ranked ninth in worldwide unit shipments--a chance to grow its PC business globally and bring yet another round of consolidation to the PC industry, which has seen a number of mergers and acquisitions in the last two years.

It would also give Lenovo access to one of the PC industry's crown jewels: IBM's popular ThinkPad notebook lineup.

Lenovo would not comment on the IBM speculation, but it has indicated that it intends to expand both in China and overseas.

"Lenovo has been notably locked in China. It gives Lenovo access to the U.S. market and access to other world markets," Kay said. But "to get the IBM notebooks would be the prize."

IBM is a distant third in unit shipments, behind Dell and Hewlett-Packard. During the third quarter, IBM had 6 percent of the market, behind Dell's 18 percent and HP's 16 percent, according to IDC figures. IBM is No. 4 in portables, with 8.9 percent share.

Yet in the Asia-Pacific region, IBM leads in notebooks, with 16.5 percent share, a commanding lead over HP's 12.3 percent. Lenovo is ranked sixth, with 7.4 percent in that market.

IBM has consolidated much of the manufacturing of its two computer lines. Most of its ThinkPad models are produced in the company's factory in Shenzhen, China. Its Netvista desktop line is produced under contract by Sanmina-SCI. In January 2002, IBM inked a three-year, $5 billion manufacturing agreement with the company to build the PCs. At the same time, Sanmina-SCI purchased IBM's desktop manufacturing operations in the United States and Scotland, which included some 980 employees, for an undisclosed sum. Later, in January 2003, IBM signed a contract with Sanmina-SCI to produce some of its xSeries servers as well.

Rumors about a potential deal have been flying for some time within some circles in China and Taiwan. Those rumors have focused more on a deal between the companies to sell PCs inside China.

The geography also works out very well, IDC's Kay said, with all of IBM's ThinkPads already being manufactured in China. Lenovo already markets desktops, so it could halt manufacturing of either the IBM line or its own line, though it would likely keep both brand names.

CNET News.com's Dawn Kawamoto contributed to this report.