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IBM Shedding PCs for Services, On-demand

IBM's decision to sell its personal computing division to China's leading PC maker Lenovo for $1.75 billion spawned diverse reactions in the industry.

Pund-It analyst and founder Charles King said Dell and HP will try to capitalize on IBM's exodus.

"Since Lenovo is not well known in the West, there's lots of available fear, uncertainty and doubt to spread about why businesses should avoid working with them," King noted.

To be sure, rival HP sees the news as a market opportunity because of the potential of a little fear, uncertainty and doubt that IBM may create by shedding its popular ThinkPad line, according to Deb Nelson, senior vice president of marketing for HP's Personal Systems Group.

"We certainly think it is an opportunity for us from the standpoint that, globally, we know that IBM customers -- we're already starting to hear from some -- are concerned about what this means. We're the same committed and stable partner that we've always been."

Analysts such as Enderle Group's Rob Enderle and Redmonk's Stephen O'Grady, think IBM could spurn some corporate customers by getting away from the ThinkPad notebook.

"[ThinkPad users] will be [mad] about them leaving the market and selling to a Chinese company they don't want to buy from," Enderle said. "Makes them feel that IBM doesn't have their interests at heart."

If Dell is happy about the freed up space in the United States, or nervous that the dominant PC maker in China has gotten a little larger, it isn't letting on.

Dell spokesman Lionel Menchaca said it will be business as usual for the Round Rock, Texas, systems vendor, despite the fact that Lenovo and Dell compete for market share in China.

"We're not looking for this to change our strategy at all," Menchaca said, pointing to Dell's global manufacturing capabilities as the launch pad for the company's direct model success.

IBM Sells to Buy

Research firms such as Forrester and Gartner believe it is high time one of the major PC vendors got out of the game to make the field less crowded, arguing that the PC sector has been ripe for consolidation for years. Why not IBM, then?

Forrester analyst Simon Yates said in a recent research note that a sale of IBM's PC business will create more breathing room for U.S. leaders HP and Dell, whose machines customers tend to favor over IBM's more expensive computers.

"Dell's and HP's aggressive pricing on corporate desktops and laptops have hurt ThinkCentre and ThinkPad sales," Yates wrote in a research report. "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."

Big Blue believes selling its PC division to Lenovo may make it a more nimble entity. IBM has made no secret that it plans to tighten its focus on selling servers, software and services to corporate companies. Most experts agree this focus has more growth opportunity than trying to make money in the saturated PC market segment.

"This transaction is consistent with IBM's strategy to focus on the high-value segments of enterprise computing, providing knowledge and transformation services to improve clients' businesses," Mark Loughridge, senior vice president and CFO of IBM, said in a webcast Tuesday.

"We will capitalize on the momentum of this to accelerate IBM's ongoing strategy of globalization and continue our transformation as an on-demand business."

Selling off hardware businesses that don't help the company grow has become something of a common phenomenon for IBM and a goal of CEO Sam Palmisano. In 2002, the company sold its disk drive division and PC manufacturing business.

But since 2002, IBM's acquisitions have well overshadowed its sell-offs. The Armonk, N.Y. company spent $9 billion on more than 30 companies, an aggressive acquisition rate by any measure.

E-business On-demand Overdrive

These purchases, mostly software and services-oriented, now provide the backbone for Big Blue's e-business on-demand strategy of powering corporate computer networks with high-performing servers and automated software.

Servers and software aside, on-demand services are perhaps IBM's ace in the IT deck. Forrester Research analyst Robert McNeill predicts IBM will be able to drill down into new types of services once it turns the support services agreements tied to PC sales over to Lenovo.

"The support services business is really a low margin business," McNeill said. "They want to be selling business process outsourcing and business transformation outsourcing with on-demand payment schemas."

McNeill said that by ridding itself of the PC unit, IBM will be able to greatly expand the margins of its services business because it'll be doing less desktop outsourcing deals that go hand in hand with selling computers.

King agreed, noting that the long-term ramifications could be more telling. By investing in Lenovo, which already has great access to government contracts in China, IBM could be positioning itself to bolster its products based on Linux, which has large and growing traction in China.

"In essence, I think the Lenovo deal is more about IBM positioning itself for potentially huge future opportunities than it is about exiting a tough and tightening market," King said.

To be sure, IBM isn't getting out of the deal with nothing. It has taken an 18.9 percent stake in Lenovo and will be the preferred services and customer financing provider to Lenovo, giving IBM more influence in the rapidly expanding IT market in China. IBM will provide marketing support and demand generation services for Lenovo products.

Lenovo, which will have a combined annual PC revenue of approximately $12 billion, will be the main supplier of PCs to IBM. Lenovo will locate its PC business headquarters in New York, with offices in Beijing and Raleigh, N.C. The deal is expected to close in the second quarter of 2005.