IBM’s Shares Up on Talk of Exiting PCs

A sale of IBM Corp.’s personal computer business would be a historic event for the company that virtually invented the PC market 23 years ago, but it wouldn’t have a big financial effect on the firm.

Financial markets were abuzz Friday over a report that the technology giant was seeking to sell its PC division, a business once synonymous with the computer industry itself.

IBM spokesman Clint Roswell said the company would not comment on the report, published in Friday’s New York Times.

But investors reacted positively to a potential divestiture of the low-margin business, driving IBM’s shares up $1.32 to $97.08 on the New York Stock Exchange.

Sales of desktop and laptop computers have trickled off to a fraction of IBM’s overall business, and are dwarfed by rivals Dell Inc. and Hewlett-Packard Co.

IBM put PCs into the hands of ordinary consumers in 1981, and its name was once synonymous with all personal computers, as users spoke of having “IBM-compatible” PCs or “IBM clones.”

Over time IBM increasingly focused on complex server computers, corporate customers, computer services and software, and it did not heavily advertise its PCs to consumers.

Although IBM is the No. 3 PC vendor worldwide, its share of the global market sank to 5.8% last year from 8.8% in 1996. During the same period, HP grew to 16.2% from 15.8%, and Dell zoomed to 16.7% from 4.2%, according to market researcher IDC.

Financial and industry analysts have long speculated that IBM would divest itself of its PC business, which brought in an estimated $8.6 billion in revenue in the last four quarters, or less than 10% of sales.

A sale “should be a moderate positive for IBM,” Merrill Lynch analyst Steven Milunovich wrote in a report to investors. “The upside is improved margins. The downside is reduced revenue. At times PCs have provided a significant part of revenue growth.”

IBM is reportedly negotiating with Chinese computer maker Lenovo Group to sell the PC unit for as much as $2 billion, according to the New York Times.

Lenovo, previously known as Legend, is known to be keen on reaching more markets. Rumors circulated last year that it was seeking to buy struggling computer maker Gateway Inc.

“IBM already has access to China,” Bajarin said. “The issue for Lenovo, if they’re interested, has nothing to do with China; it’s their ability to expand internationally.”

In a report issued Monday, technology market researcher Gartner predicted local PC makers would seek to acquire rivals “and develop the scale economies required to springboard into a global presence.”

Leslie Fiering, vice president for research at Gartner, said in the report that “exiting the market may be the only logical choice for global vendors bleeding profits and struggling for share.”

Even if Big Blue sells its PC business, it is still likely to sell PCs, especially to customers of its server computers, said Tim Bajarin, president of technology consultant Creative Strategies.

“Whoever they sell to is likely to be a strategic partner,” possibly making PCs that still bear the IBM logo, said Bajarin, who was a consultant on IBM’s first PC introduced in 1981.

PCs are seen as a way to get a foot in a corporation’s door to make way for much more lucrative contracts for industrial-strength server computers that run corporate, government and university computer systems.

“Leading with a PC deal often allows IBM to bundle packages for higher-margin products such as servers and storage in a complete package,” said Steve Fortuna, a computer analyst with Prudential Equity Group.

But with IBM’s focus on software and services, “the PC business is absolutely not strategic to its long-term core strategy,” Fortuna said.

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PC market share

2004* worldwide market share for top-selling vendors of personal computers

Dell: 18%

Hewlett-Packard: 16%

IBM: 6%

Fujitsu: 4%

Toshiba: 3%

* First 9 months

Source: IDC