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Commentary: IBM should sell PC unit

Passing the PC business to a buyer would fit the company's goal of escaping tight margins and focusing on fatter profits.

Commentary: IBM should sell PC unit
By Forrester Research
Special to CNET News.com
December 7, 2004, 7:20AM PST

by Simon Yates and Robert McNeill, Senior Analysts

IBM is reportedly in talks to sell off its personal computing division to Chinese PC manufacturer Lenovo or perhaps another potential bidder. We think it's time.

Selling the unit would fit with CEO Sam Palmisano's strategy of unloading lower-margin hardware businesses and take IBM out of the margin-squeezed PC market to focus on more profitable server, software and services businesses. At the same time, a sale would reduce the number of core enterprise PC vendors to two--Dell and Hewlett-Packard--and perhaps open the door to the U.S. enterprise market for consumer-oriented Fujitsu and struggling Toshiba.

Related story

An agreement in principle to sell IBM's PC business to Lenovo could be announced as early as Tuesday.

For the past several years, speculation that IBM would exit the PC business has surfaced on a regular basis. Now the speculation is that it may actually be up for sale, with Lenovo--China's largest PC manufacturer--as a possible acquirer. Forrester views the potential sale of IBM's personal computing division as a predictable and logical strategy for Big Blue in the pursuit of higher-margin services business.

Selling the PC business would:

• Fit with Palmisano's strategy of selling off low-margin hardware businesses. When Palmisano took the reins, he made it very clear that the plan would be to exit low-margin hardware businesses, and PCs fall into that category. In 2002, IBM sold its hard-disk business to Hitachi and its PC manufacturing business to Sanmina-SCI, but it held on to the PC business, despite eroding margins. Our research shows that Dell and HP have a much stronger position as the primary supplier of PC technology than IBM.

• Take IBM out of a margin-squeezing market. Big Blue is fighting a losing battle in the PC business against Dell and HP, as customers appear to favor the aggressive pricing strategies of those two companies over IBM's industrial strength and IT-friendly message. Dell's and HP's aggressive pricing on corporate desktops and laptops have hurt ThinkCentre and ThinkPad sales. To sustain--never mind grow--its PC business, IBM would need to significantly cut prices and profit margins on PC products, and that is not a direction that IBM wants to go in.

• Solidify Dell and HP as the No. 1 and No. 2 PC sellers. Today, 91 percent of enterprises point to Dell, HP or IBM as their primary PC suppliers, but taking IBM out of the equation--and reducing the viable choices to two--would create big market share opportunities for Dell and HP. Selling the PC business would validate Dell's strategy of having a high-volume PC-manufacturing business with a services portfolio aimed solely at supporting its own products and make it a clear winner in the PC market. HP, on the other hand, will have to better articulate its strategy of supporting a commodity PC business with a higher-margin outsourcing and services portfolio.

© 2004, Forrester Research, Inc. All rights reserved. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change.