IBM to sell its PC and ThinkPad business

[Dinner]

I know Legend makes Dell and I believe HP's are made in Taiwan (or at least the HP my dad bought three years ago was) but I don't know about IBM.

Asher, do you know where Thinkpads are made?

[Asher]

ThinkPads are made in China and designed in Japan.

ThinkCentres and NetVistas are made and designed in the US.

[Atahualpa]

The deal has been made (according to slashdot, according to news.com):

http://slashdot.org/article.pl?sid=04/12/08/0314207&from=rss

[Asher]

[Asher]

http://news.com.com/IBM+sought+a+China+partnership%2C+not+just+a+sale/2100-1042_3-5488288.html?tag=nefd.top

IBM sought a China partnership, not just a sale
Published: December 12, 2004, 7:55 PM PST
By Steve Lohr
The New York Times

In July 2003, Sam Palmisano, the chief executive of IBM, traveled to Beijing to explore the sale of the company's personal computer business. But he did not start by making the usual visit with executives of IBM's preferred partner, Lenovo, China's largest personal computer maker.

Instead, Palmisano first engaged in a bit of old-fashioned courtship. Before formally approaching Lenovo, he sought permission from the parents, by meeting privately with a senior Chinese government official in charge of economic and technology policy.

IBM was not merely looking to sell its PC business, Palmisano told the official, but had bigger aspirations of creating a global enterprise, with IBM contributing technology, management, marketing and distribution.

The idea, Palmisano explained, would be to build a modern and truly international Chinese-owned corporation. The move, he added, would demonstrate China's desire to take that next step toward economic maturity by investing abroad instead of merely serving as a manufacturing hub for the rest of the world.

The senior Chinese government official, Palmisano recalled, responded, "That is the future model for where we see China headed."

Permission was granted.

Inside IBM, the issue of whether to stay in the personal computer business has been debated for a decade. But the road to the Lenovo deal, according to IBM executives, began in 2000, shortly after Palmisano became the company's president and chief operating officer. He ordered an extensive review of the PC business and decided to stop selling IBM PC's through retail stores.

At about that time, IBM approached Lenovo for the first time, according to a person close to Lenovo, seeking to sell its PC business for $3 billion to $4 billion. At the time, IBM had let its investment bankers know that if an attractive offer came up for the PC business, it would certainly consider a sale. But IBM executives say that any discussion in 2000 was probably a prospecting overture by an outside adviser representing the company.

In May 2002, Palmisano directed John Joyce, then IBM's chief financial officer, to meet with Lenovo's senior management to sound out the company's interest in establishing a business relationship. Lenovo, according to IBM executives, was intrigued and had long been exploring ways to increase its international presence.

More than a year later, at the meeting in Beijing, the government official told Palmisano that a few years earlier the Chinese authorities would have been involved in such talks. But times had changed, the official said, and Lenovo and IBM could negotiate by themselves.

By October 2003, IBM resumed discussions with Lenovo. In March, Palmisano went to Beijing to meet with Lenovo's founder, Liu Chuanzhi, as well as its president, Yang Yuanqing, and the chief financial officer, Mary Ma. That was when Palmisano fully described what he had in mind. "I put it all on the table," he said.

Lenovo was definitely interested, though any such deal would be complicated. Many of the essential elements of the deal were hammered out over eight days in June, in a hotel near Raleigh, N.C., where IBM's PC business is based. The principal negotiators included Joyce, who now heads IBM's services business, Stephen Ward Jr., an IBM executive who will become chief executive of the Lenovo PC business, and Yang.

There were other interested bidders, including one from an American buyout firm whose offer remained on the table until the end. And the Lenovo deal could have fallen apart. But apparently the Chinese option was the only one seriously pursued by IBM.

"There were simpler transactions we could have done," Palmisano said, adding, "What we wanted was not a divestiture, but this strategic relationship with Lenovo and China."

The sale of IBM's personal computer business to Lenovo for $1.75 billion, announced last Tuesday, is "a three-dimensional deal," Palmisano said. The sale provides IBM with a path to leave a business that is large but not profitable. It is also the latest step in IBM's shift toward services, software and specialized hardware technology from mainframes to microprocessors for computer game consoles, all of which promise higher profits than the fiercely competitive PC business.

Yet the most intriguing, and potentially most important, dimension of the deal for the company is that it is IBM's China card. The new Lenovo, folding in the IBM personal computer business, will be China's fifth-largest company, with $12.5 billion in sales in 2003, and the Chinese government will remain a big shareholder. IBM is eager to help China with its industrial policy of moving up the economic ladder, by building the high-technology engine rooms to power modern corporations and government institutions with IBM services and software.

The deal is not expected to face any regulatory hurdles. Although there is a requirement, dating back to the era of the cold war, for review of possible national security implications, officials in Washington told IBM executives in advance of the announcement that clearing it would not be a problem.

The pact could give IBM "an extremely important leg up in China," Laura Conigliaro, an analyst with Goldman, Sachs, whose investment banking arm advised Lenovo, wrote in a report last week. "Ultimately, this is the single most valuable benefit to IBM from this transaction."

The payoff for IBM, if any, will come gradually. The Lenovo deal, in which IBM will take an 18.9 percent stake in the Chinese company, is a sign of IBM's commitment to China. IBM is placing 10,000 of its employees, its brand for five years and some its prestige in Lenovo's hands. There is a lot more at stake than the $1.25 billion in cash and stock Lenovo is paying, and $500 million in debt obligations it will assume.

In China, IBM is using a variation of the globalization formula that has worked well for it in Japan, Europe and elsewhere. IBM patiently nurtures close ties with the government and becomes a premier employer and a stellar corporate citizen--so much so that it is eventually regarded more like a local company than an outsider.

"We don't have any special deal with the Chinese government or any other government really," Palmisano explained last week over lunch at IBM headquarters. "It's a much more subtle, more sophisticated approach. It is that if you become ingrained in their agenda and become truly local and help them advance, then your opportunities are enlarged.

"You become part of their strategy," he added.

IBM is no newcomer to China. It set up a business there 20 years ago, and there are now 4,200 IBM employees in China. In 1995, the company opened a research laboratory, which now employs 150 Chinese scientists. Five years ago, IBM established a Chinese software development lab, which today has 500 engineers working on Linux projects alone. (IBM is the leading corporate supporter of Linux, a free operating system that is an alternative to Microsoft Windows.)

With the Lenovo deal, IBM is forging even closer links with China. While there were other offers for its PC business, Palmisano pushed hard for this deal--more a bridge to another economy than a simple sell-off.

Palmisano, 53, who became chief executive in 2002, is the leader of a generation of executives groomed to run a corporation that is based in the United States but gets the majority of its revenue abroad, as IBM does today. Traveling extensively is part of the regimen, as are stints of living abroad.

Palmisano managed IBM's large business in Japan in the early 1990s. He traveled extensively in Asia, including China, and continues to do so as chief executive. He makes three or four trips a year to China on business, and last summer he spent two weeks traveling across the country with his four children. "It was so they could get a feel for the Chinese culture and what's going on there," he said. "China is going to be such a huge influence in the world in their lives."

IBM's departure from the personal computer industry, Palmisano insisted, does not mean that the PC business is a bad one. But it does signal that it is no longer crucial to IBM's strategy of emphasizing services, software and server computers for corporate customers.

In an e-mail message to employees last week, Palmisano explained how the company's strategy and the PC business had parted ways. Today, there are two ways to create long-term value for information technology customers and shareholders, he wrote: "Invest heavily in R&D and be the high-value innovation provider for enterprises, or differentiate by leveraging vast economies of scale, high volumes and price."

IBM is choosing the first path, and has decided that the PC business is inevitably on the second path.

David Barboza contributed reporting from Beijing for this article.

Entire contents, Copyright © 2004 The New York Times. All rights reserved.

[Tassadar500]

On the subject of computers, when do you think the 64-bit Intel processor will come out?

[/threadjack]

[Asher]

64-bit Xeons are out, 64-bit Pentium 4s about halfway through next year.

[Asher]

Originally posted by Agathon
Yep, and the lamers like IBM who pissed away their businiess are getting out.

Originally posted by Agathon
IBM are getting out before they're pushed out. Plain and simple. It's just yet another IBM failure.

Originally posted by Agathon
Of course, unless they wanted to make more money.

Dell seems to be doing fairly well. That could have been IBM if they'd had any brains.

Originally posted by Agathon
This has become boring.

Who cares about IBM anymore apart from faceless officials and other boring people?

Originally posted by Oerdin
IBM's mangement is blowing this. They may not make bucket fulls of cash on desktops and laptops but they get a lot of market and name recognition for this line of business. They can claim the market isn't big enough for them to worry about but the truth is they're getting out because they can't hack it.

Or rather because a short sighted CEO doesn't want to hack it.

Originally posted by Agathon
Yep.

I love this "solutions" crap. More marketing gobbledigook....

This is a great thread context to post IBM's latest quarterly results -- over $3B in net profit in the 4th quarter, a record. Growth in every sector.

More info here: http://www.ibm.com/investor/4q04/4q04earnings.phtml

And article here:

IBM earned $3bn in Q4
By Lucy Sherriff
Published Wednesday 19th January 2005 15:01 GMT

IBM has posted its best ever fourth quarter results, reporting profits of $3bn for the period. The company said revenues had risen seven per cent on the same period last year to $27.7bn, boosted slightly by the weak dollar.

The company also announced total revenue for 2004 of $96.5bn, and said that 2005 would see that figure rise to $102bn.

Mark Loughridge, Big Blue's CFO, said that the market trend streamlining supplier bases had seen many corporations looking for one company to provide hardware, software and support packages. This, he said, has boosted IBM's performance.

Meanwhile, Goldman Sachs put a "buy" rating on IBM's stock, saying that the company had got a lot of things right in 2004. Selling off its loss-making PC division is almost certainly one of them. All told, IBM is handing Lenovo a business with nearly $1bn in losses in recent years.

http://news.com.com/IBM+profit+tops+3+billion/2100-7341_3-5540716.html?tag=nl

IBM profit tops $3 billion
Published: January 18, 2005, 3:07 PM PST
By Martin LaMonica
Staff Writer, CNET News.com

IBM reported strong fourth-quarter earnings that surpassed analysts' targets and said it plans to deliver double-digit profit growth this year.

The computing giant said Tuesday that its net income was $3.04 billion for the quarter ended Dec. 31, a rise of 16 percent compared with the same period the previous year. Its earnings of $1.81 per share exceeded the consensus estimate of $1.75 per share given by analysts polled by Thomson First Call.

"IBM delivered a powerful fourth quarter, reflecting the strength of our integrated business model. It was IBM's strongest fourth quarter ever, with earnings exceeding $3 billion for the first time," Sam Palmisano, IBM's chairman and chief executive officer, said in a statement.

Revenue in the quarter grew by 7 percent, or 3 percent at constant currency, to total $27.6 billion. The IBM Global Services consulting unit, which brings in about half the company's sales, saw its revenue grow 10 percent, or 6 percent in constant currency. IBM's revenue from its hardware business was up by 4 percent, and from its software business up by 7 percent, year-over-year.

The Armonk, N.Y., company also announced its full-year 2004 results, reporting earnings per share of $4.94--a 14 percent increase compared with 2003.

Those earnings were dampened by a pension settlement, which IBM recognized in the third quarter of 2004. The cost of the settlement is estimated at about $1 billion, Mark Loughridge, IBM's chief financial officer and senior vice president, said in a conference call.

Taking out one-time payments related to the pension settlement, 2004 earnings per share would have been $5.05. In the most recent survey, financial analysts expected the company to return $5.01 per share for the year.

Loughridge said IBM can maintain double-digit growth in earnings in the coming year. He said a 5 percent increase in revenue, aided by improved productivity and stock repurchasing plan, will result in 10 percent growth in profit. Organic growth, stemming from IBM's product upgrades and continued expansion in emerging markets, will drive sales, he said. He noted that, in general, corporate spending on technology remains steady.

Addressing IBM's sale of its PC business, Loughridge said the company intends to continue its strategy of investing in "higher-value" product and services areas and of investing away from commodities such as PCs. IBM made 14 acquisitions in 2004, all of which were in the software and services area.

So Agathon, care to continue calling IBM idiots and dismissing the notion I was arguing for of sticking to high-margin software/services/solutions?

[Agathon]

So Agathon, care to continue calling IBM idiots and dismissing the notion I was arguing for of sticking to high-margin software/services/solutions?

Just think how much more they could have earned if they had kept their PC business and managed it properly.

IBM are idiots.

[optimus2861]

^ Sheesh .

Did you even look at the gross margin figures? A quick Google for Dell's results show they can't crack 20%. IBM's lowest figure in its divisions is 25%.

If that's being "idiots", I want to be as stupid as IBM.

[Asher]

Originally posted by Agathon
Just think how much more they could have earned if they had kept their PC business and managed it properly.

Substantially less, since the margins are thin on those parts and costs high.

[Agathon]

Substantially less, since the margins are thin on those parts and costs high.

That's poor logic. There is no necessary connection between IBM getting out of the personal computer business and making more money. Other companies, particularly Dell, manage to make money selling personal computers. Better management could have improved IBM's performance in this area. But they cried uncle and wimped out.

[Asher]

Originally posted by Agathon
That's poor logic. There is no necessary connection between IBM getting out of the personal computer business and making more money. Other companies, particularly Dell, manage to make money selling personal computers. Better management could have improved IBM's performance in this area. But they cried uncle and wimped out.

Dell has a completely different corporate structure, business model, and target customer than IBM.

IBM sold the division for a couple billion dollars and is using the money to continue its push into sectors that have far higher profit margins, and far higher growth.

That's where the logic is. That's why I disagreed with you originally, and that's why I disagree with you now, and that's why most people with any business sense at all will tell you it's a smart move.

It would make no sense for a company whose strategy is high-margin services and software for businesses to make consumer commodity products -- period.

They're extremely successful right now, far successful than Apple has been, is, or will ever be. The last thing they should be doing is taking cues from Apple and its supporters.