End of Era? IBM Reportedly To Get Out of PC Business

In a move that could end an era by eliminating a pioneer from the personal computer industry, IBM (NYSE: IBM) has reportedly put its PC business up for sale and might already have at least one prospective buyer for the unit, which analysts say could fetch as much as US$2 billion.

Big Blue has refused to comment in detail but also has not disputed published reports suggesting that it has begun to solicit offers for its PC division, which produces desktops as well as notebook computers, including the ThinkPad line that has long been a favorite among many business travelers.

Reports say that China-based Lenovo Group has already inquired about buying the business, along with at least one other, yet-unnamed suitor.

Whoever steps forward to buy the unit, the transaction will instantly alter the industry landscape. IBM's sales would likely not be enough to change the top two rankings, where Dell (Nasdaq: DELL) and Hewlett-Packard (NYSE: HPQ) have duked it out almost exclusively for nearly three years. However, for Lenovo, which currently ranks ninth worldwide in sales volume, the move could mean a move into the top five.

Symbolic Significance

The spin-off would have even more symbolic weight, however, since IBM was one of the companies that helped the personal computer become a fixture on business, and eventually home, desktops, and was largely responsible for the dominance of software maker Microsoft (Nasdaq: MSFT). The sale would emphasize the shift in the tech industry toward services and complex enterprise computing equipment, according to analysts.

Still, it's not a total surprise, as analysts have suggested that the PC industry was in line for some changes as market conditions shifted, with growth coming more from Asia and other parts of the world than from the U.S. and with price pressures driving down profit margin.

In fact, this week, Gartner (NYSE: IT) released a report predicting that as many as three of the top 10 worldwide vendors would exit the market within the next three years. IBM ranks third in terms of units sold annually, according to Gartner.

Separately, an analyst who follows IBM for UBS investment research said in a research note in July that the PC business would be on the market soon. Analyst Ben Reitzes noted that when measured alone, the PC unit is actually a money-loser for IBM and one of the few divisions that has not experienced increasing profit margins in recent quarters.

Changing Landscape, Changing Times

"Tougher times lie ahead," Gartner research Vice President Leslie Fiering said. PC growth is expected to be around 15 percent this year, drop to the low double-digit range in 2005 and then slow considerably, she noted. "Next year will be strong for PC makers, but once the current replacement cycle starts to run out, the market will be a much more competitive place."

The Gartner report specifically called out third-place IBM and number-two HP's PC units as ripe for spinoff. Those companies see much higher profit margins from high-end servers and enterprise-level sales, which also feed growth in their services units.

"At some point, the question becomes whether the PC business is a benefit or a drag to the overall business," Fiering added.

While some vendors will seek to divest, others might find benefits in terms of cost savings by growing, which will make the IBM unit attractive to many potential buyers who could substantially increase their market share and buying power through a purchase.

The expansion possibilities appear especially strong for China-based companies such as Lenovo, which already enjoy low operating costs that give them the ability to compete on the global stage in terms of price.

In fact, Fiering said Lenovo could use IBM's PC business to springboard from a regional powerhouse into a "global presence."

While IBM was mum on its plans, the reports might help speed a sale, analysts said. One factor in buying PCs, especially at the enterprise level, is the expectations for long-term support and service. A company known to be mulling dumping its PC business might be a less appealing vendor in that situation.

End of an Era

Jupiter Research analyst Joe Wilcox said the symbolism of the IBM move is striking.

"IBM is the originator of the popular personal computer and the vendor largely responsible for getting Microsoft operating systems off the ground," Wilcox said.

Still, he agreed the move has been in the making for some time, with IBM having given up on directly targeting consumers with its notebook and desktop machines some time ago. While selling large shipments of PCs to enterprises was a way to drive services revenue -- to network and service those same machines -- Big Blue might have found that it was past the tipping point at which the PC as a loss leader was no longer viable.

"PCs continue to become a commodity business," Wilcox added. "Maybe IBM has reached the point where PCs are no longer viable enough to draw in the extra services revenue."