Analysts: Is Lenovo Right for IBM's PC Biz?

By Daniel Drew Turner  |  Posted 2004-12-03 Email Print this article Print
 
 
 
 
 
 
 

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A New York Times report says IBM is negotiating the sale of its personal computer business to China's biggest PC maker. But analysts wonder what Lenovo thinks it would be buying—and how it could make PCs as cheap as those from rival Dell.

A report in The New York Times that IBM is poised to sell off its PC unit has provoked mixed reactions and tentative interpretations from analysts who follow the historic company.

The Times' story said negotiations of such a sale have progressed between Armonk, N.Y.-based IBM and Lenovo Group, China's biggest maker of personal computers, and at least one other unidentified buyer.

IBM has not itself manufactured PCs since 2002, when it sold its manufacturing operations. Like athletic-wear company Nike of Beaverton, Ore., IBM designs and markets the products bearing its name, while other companies are contracted for manufacturing.

IBM has long been moving toward becoming a service company, said Tim Bajarin, president of Creative Strategies of Campbell, Calif. In comparison with the company's business from consulting and services, which netted $3.2 billion in income and $36 billion in revenue for the first nine months of 2004, IBM's PC business took in well under $100 million on $9.4 billion in revenue.

"I do believe IBM wants to get out," Barajin said, noting the increasing support costs and lower margin hitting all PC manufacturers. But he said he was surprised that Lenovo would be a potential buyer.

"I assume the buyer would be the main supplier of PCs to IBM's customers," he said, and he wondered whether Lenovo could live up to the "long IBM heritage."

"It's an incredibly difficult issue," he said, adding that simply selling to the highest bidder wouldn't be a good move for IBM.

"The buyer would have to be a partner, to ensure that the product quality wouldn't slip and that IBM would be able to service and support the product."

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"I don't know if it'd be so smart a move," said Charles Wolf, an analyst at Needham & Company in New York. In 1999, Wolf wrote a report suggesting that IBM outsource all of its manufacturing—three years before it did so.

"If indeed the buyer is Lenovo, they can't make the PCs any cheaper than Dell does," Wolf said. In addition, Wolf said he wasn't sure how Lenovo could break into the U.S. market, especially when competing against Dell and Hewlett-Packard.

"It's a risky gambit," Wolf said, noting that though IBM makes little from the division, the company could be hit with a drop in its core business if customers see a drop in quality or reliability in a product tied to IBM's services and existing server offerings, as the current PC division is.

Next Page: Writing off its PC business?

Rob Enderle, principal analyst at the San Jose, Calif.-based Enderle Group, sees the thought of IBM selling off its PC division as not so much of a risk, but rather the end. "If IBM did sell its PC business to Lenovo, they can write it off," he said.

"About 50 percent of IBM's PC sales go to governments and large enterprises, most of which are multinational—these customers would not migrate."

He said that out of the other half of the company's customers, which are largely SMBs, about half of those would move over.

"Probably about 75 percent of customers wouldn't migrate," Enderle said, adding that existing customer contracts probably would not be portable.

"I don't know what Lenovo would think they are buying," he said. "It's really the connection to IBM that people buy."

Bajarin agreed that it seemed "highly unlikely Lenovo is the right kind of partner." He added, "In the longer term, it's a branding and support question."

Still, Bajarin said, even if a sale goes through as speculated, IBM will remain a potent force in the computing market. "It's hard to say how this would affect other PC manufacturers; it depends on who gets it," he said, adding that "Dell and HP must be thrilled on the news—it's the FUD [fear, uncertainty, doubt] factor."

"But no matter who gets it," Bajarin said, "IBM is still a worthy competitor."

Other analysts looked at the Times report not so much as news but as a sign of the inevitable.

Earlier this week, Gartner, a research firm headquartered in Stamford, Conn., released a report positing that three of the top 10 PC vendors would depart the market by 2007.

The report cited a halving of sales growth and profit margins for the period 2006-08, compared with 2003-05, as the primary cause. Gartner's analysis showed a drop in growth rates from 11.3 percent to 5.7 percent annually, and revenue growth down to 2 percent from 4.7 percent.

The top 10 vendors include Dell, HP, IBM, Fujitsu/Fujitsu Siemens, Toshiba, Acer, NEC, Legend, Gateway and Apple Computer, determined by unit shipment. The report singled out the PC divisions of HP and IBM as vulnerable to being sold or spun off, "if their drag on margins and profitability are deemed too great by their parent companies."

IBM's PC division has not recently shown a loss, but profits have been nearly negligible—less than $100 million in the past year.

Despite the close timing of the Gartner report and rumblings about IBM's selling of its personal computer business, Andrew Spender, Gartner's senior director of public relations, was quick to point out that such rumblings are "speculative."

He stressed that Gartner's conclusions were not based on inside information. Though he stood by the report, he said that, at the moment, there is "no corroborating fact" such that he could confirm other news about IBM.

IBM did not return requests for comment.

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