As IBM sells its PC division to China's biggest PC maker for $1.75 billion in cash and shares, it means Lenovo becomes IBM's "preferred supplier" of PCs and ThinkPad laptops, boosting the Chinese company's PC business turnover to $12 billion from the sale of 11.5 million units. Effectively, IBM becomes Lenovo's route to IBM's global markets, with Big Blue supplying customer finance as well.
In the face of predictions of faltering sales growth and diminishing market share, IBM's chairman and CEO explained the reasoning behind the sale to its employees in a leaked memo. He said that IBM wanted to focus on high value, innovative opportunities, where it can bring the fruits of its massive R&D spend to bear, rather than focus on "vast economies of scale, high volumes and price". He said that the PC business had become commoditised and driven by consumer needs, which no longer matched Big Blue's business model.
In addition, he said, side benefits of the sale to a Chinese manufacturer gives the company access to China, even if only to strengthen its brand image there. The move is also consistent with IBM's focus in recent years on high added value services rather than finished products.
He went on to hedge his bets, saying that of course this didn't mean that IBM wasn't interested in future opportunities in this area, especially in when it comes to processors. "In just the past couple of weeks, we've made significant announcements about advanced microprocessors we are developing in partnership with some of the world's leading consumer electronics companies, as well as initiatives to broaden adoption and support for these open platforms", his memo concluded.
On the face of it, IBM's move flies in the face of its recent strong showings in the PC market. Its personal systems group, which includes its PC business, has shown strong year-on-year sales growth for each of the first three quarters of this year, according to the company.
Revenues increased 17 per cent compared to the three-month period a year ago to US$3.3 billion on strong sales of mobile PCs during the third quarter, the company said in October. Similarly, strong sales of mobile PCs - its highly regarded ThinkPad range of notebooks - contributed to 16 per cent year-on-year growth for the second quarter and 18 per cent year-on-year growth for the first quarter, the company has said previously.
Market researcher IDC concurs, placing IBM as the world's third biggest seller of PCs in the second quarter of this year. Its global shipments of 3.2 million PCs were about 16 per cent higher than the second quarter of 2003.
However, in a recent report, researcher Gartner predicted that PC revenue growth is likely to fall an average of two per cent annually from 2006 to 2008, half the growth experienced in the previous two years, and that three of the world's top ten PC vendors would sell their businesses or pull out of the market by 2007 because of slower growth rates and reduced profit margins.
The move leaves IBM's major competitor and PC market leader Dell in top spot in the PC making market, and with one fewer competitor. While IBM remains services-orientated, Dell is focused on execution - something it clearly does well, since it has been gaining market share in China. However, even Dell has to sway with the wind. China Business Strategy reported recently that Dell has pulled out of the low-end server market to concentrate on higher margin business, a move it has admitted will slow unit sales growth.
In the light of that, IBM's move looks like it makes sense - even if it does mean that the inventor of the PC no longer makes them. It's not committed to the high-risk business of manufacturing but retains visibility in an area of the globe where local customs and brands matter more even than IBM does. But it's Michael Dell who's left with a smile on his face.
So predictably, Dell has trashed the deal. Michael Dell at Oracle's OpenWorld last week said that "We're not big fans of the idea of taking companies and smashing them together. When was the last time you saw a successful acquisition or merger in the computer industry? It hasn't happened in a long, long time... I don't see this one as being all that different."