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IBM plans layoffs, merges PC groups

Big Blue will cut or move 5 to 10 percent of its PC workers and merge its consumer group into its larger organization for corporate PCs, sources say.

In an effort to streamline operations, IBM will merge its consumer PC group into its larger organization for corporate computers, amid concerns that the fourth quarter may not be as good as expected.

Between 5 and 10 percent of the "overall Personal Systems Group" workforce, or 500 to 1,000 people, will either be laid off or "sent elsewhere within the company," said Trink Guarino, an IBM spokeswoman. News of the reorganization surfaced yesterday.

The consolidation underscores Big Blue's ongoing efforts to enhance the profitability of its PC division, which has been hit hard in the past two years by descending PC prices.

In its last fiscal year, the company lost close to $1 billion because of personal computer sales. As with other major PC makers, IBM is selling more PCs than ever before but netting much lower returns because of price cuts.

Although the change will reduce costs, analysts are worried about IBM's current quarter because of other issues. Goldman Sachs analyst Laura Conigliaro today lowered her estimate for IBM's fourth-quarter earnings by 10 cents a share.

"Because of its weak hardware business and broad information technology exposure, we believe IBM may be more exposed to Y2K-related pullbacks in spending. We are lowering our Q4 EPS estimate to $1.25 from $1.35," Conigliaro said in a report.

IBM's stock so far has dropped more than four points to 112.13 in midday trading.

Conigliaro's earnings revision was based on slow sales of high-end server hardware. "Mainframes and AS/400s were weak in the quarter, possibly even more so than the depressed results we are carrying in our current model," Conigliaro said in a report.

Though IBM's consulting and services business exposes it to Y2K worries, it shields it from effects of the Taiwan earthquake. "With notebooks and consumer PCs representing less than 5 percent of total revenue, even a worst-case scenario assuming several weeks of disruption would result in a significantly less than 1 percentage point impact on revenue growth," Conigliaro said in a report.

Under the reorganization, IBM's consumer division, which is currently responsible for the Aptiva line, will become part of IBM's Personal Systems Group and be known by the name "individual segment," Guarino confirmed. The consolidation will allow IBM to better coordinate hardware strategies across product segments as well as eliminate redundancy.

Before the change, "every brand had its own marketing team, its own channel team, its own service and support team, its own legal team, its own financial team," said Guarino. With the new regime, IBM will only have one marketing group, broken up into segments. Manufacturing, she added, was consolidated last year.

Analysts and observers have debated whether IBM will eventually exit the PC market. While intriguing in the abstract, most have said that the prospect of such a move is unlikely because PCs lead to the sales of other products and services.

"It is fundamental for us to be in the PC business to provide solutions to customers," said Jim Pertzborn, IBM's new general manager at the Personal Systems Group, in April.

Guarino also said the PC maker is not pulling out of retail. Instead, it will deploy a hybrid strategy where it will sell PCs in stores but also "ramp up online sales quickly."

News.com's Brooke Crothers and Stephen Shankland contributed to this report.