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IBM Expected To Make PC Sale Official

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IBM is widely expected to announce Tuesday that it is selling its PC division to Chinese computer maker Lenovo — after the PC maker confirmed it is “in confidential discussions with a major international company in the information technology industry in relation to a possible acquisition.”

Lenovo’s statement came as it suspended trading in its shares Monday on Hong Kong’s Stock Exchange, “pending an announcement regarding price sensitive information.”

On Tuesday, the Wall Street Journal, citing unnamed sources, reported that IBM is planning to sell a majority stake of its PC division to Lenovo, with Big Blue expected to hold a minority stake.

IBM did not respond to requests for comment.

Numerous reports have pegged the deal at close to $2 billion, which analysts have largely applauded — despite IBM’s success with the ThinkPad laptop series.

Analysts said the time is right for IBM to move on, but that rival manufacturers may not get that much of a revenue bump with Big Blue out of the picture.

Investment firm Merrill Lynch called the move moderately positive for IBM, which could improve its margins and return on investment capital, even at the expense of reduced revenue.

“If IBM is exiting PCs, management is likely making a long-term call that PCs are commodities,” Merrill said in a note Friday, after the New York Times first reported the deal.

After all, the report added, IBM has already ditched its hard drive and DRAM lines of business in recent years.

There is one part of the PC business that’s done especially well for IBM, Merrill Lynch said: the ThinkPad series of laptops. While IBM has a 5 percent worldwide PC market share, according to Merrill’s calculations, it holds 9 percent of the game in notebooks. Dropping the ThinkPad, ubiquitous in executive carry-ons, along with the rest of its corporate PC business, could benefit rivals HP and Dell, Merrill said.

The industry has been laying odds for some time over who is most primed to exit the PC market. A week before the IBM news broke, research firm Gartner predicted that two of the top three PC vendors would fold their tents by 2007.

“We believe these are actually the good times for the PC business. It will get a lot tougher going forward,” said Leslie Fiering, research vice president for Gartner’s Client Platforms group, who wrote the report. She said an enterprise PC replacement cycle that began in 2000 is past its peak, and sales in emerging markets won’t be enough to offset the decline in business sales, leading to her prediction that something’s gotta give among PC makers in the industry soon.

Neither does she think the advent of 64-bit computing or Longhorn, Microsoft’s next version of Windows due in 2006, will be enough to open corporate purse strings.

“Traditionally, speeds and feeds have not been enough to get businesses to speed up their replacement cycles. With many having bought machines within the last year, they’ll wait at least three years for notebooks and four for desktops on average before they open their purses again,” she said.

Lenovo could also work out the deal so that it retains rights to use the IBM brand, as it fills out its own line of PCs. In May, the 16-year-old company, which is based in Beijing and partly owned by the Chinese government, introduced four new notebook models running Intel’s Centrino Wi-Fi enabled chipsets. The company’s Soleil A500 also comes with preinstalled Wi-Fi and Bluetooth, while the Soleil S620 is a 12-inch notebook that boasts a fully rotatable LCD display that weighs 3.5 pounds.

According to its most recent financial results, reported November 16, its net profit for the first half of fiscal 2004/2005 grew 16 percent to $80 million and its share of the Chinese PC market was 27 percent. But revenue fell 5 percent, to $1.49 billion.

Lenovo could even get an edge on top PC vendor Dell, competing with its quick-ship model, according to Sageza Group analyst Jim Balderston. “Almost all Dell’s components are being made in Asia,” he pointed out, “so an Asian company coming in to pick up IBM’s PC business could have significant advantages in parts and assembly.” That would be especially true for sales in Asia, where Lenovo would also save on shipping costs.

While the rumored sale could bring a happy glow to competitors’ domestic sales, it could dim their prospects in the booming Asian market, Balderston said.

“If [the buyer] is an Asian company that probably will crimp their ability to get into the Asian market, and certainly the Chinese,” he said. “The Chinese are working very hard to build their own IT vendor ecosystem so they’re not tied to foreign companies.”

Lenovo is a Microsoft Windows reseller and prominently recommends Windows on its Web site, so this particular deal could actually benefit Microsoft, according to IDC analyst Roger Kay. IBM, by contrast, has been pushing the Linux OS for business customers.

Kay said if the deal goes through, HP and Dell will “make hay while the sun shines, spreading fear, uncertainty and doubt among IBM’s enterprise customers about whether IBM will be there to support them.”

Laptop maker Toshiba will be another winner, Kay said. “Anything that causes a disruption in IBM’s position in notebooks will be helpful to its competitors.”

According to Gartner, the top 10 worldwide PC vendors, by unit shipment, are Dell, HP, IBM, Fujitsu/Fujitsu Siemens, Toshiba, Acer, NEC, Legend, Gateway and Apple Computer.

Of these, only Dell has consistently been profitable in the past several years. Gartner said the PC divisions of HP and IBM are vulnerable to being spun off if their drag on margins and profitability are deemed too great by their parent companies.

The firm forecasts PC unit growth averaging 5.7 percent annually from 2006 through 2008, down by nearly half from the 11.3 percent average of 2003 through 2005.

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