IBM looks to keep customers after PC division sale

Officials tamped down speculation that servers could be next

LAS VEGAS -- Now that IBM has decided to sell its PC division to China-based Lenovo Group Ltd., the company must try to keep its corporate and government customers -- who helped make IBM the third largest PC vendor in the world -- from moving off of its standard-setting brand.

IBM expects to complete the sale of its division, a deal worth $1.75 billion in cash, equity and assumption of debt, sometime in the second quarter of next year (see story). As part of the deal, IBM will wind up with an approximately 19% stake in Lenovo.

Deepak Advani, chief marketing officer for IBM's Personal Computing Division, said that while Lenovo will be making its PCs and laptops, IBM will continue to deliver support and service. "A lot of our large customers want IBM doing the service and support, and that's what they will get as part of this deal," he said.

Lenovo will manufacture the hardware under IBM brand names and to IBM quality standards for at least five years. Advani said the agreement means the IBM name has the potential of continuing "forever" on the PC line.

This sale doesn't affect IBM's retail point-of-sale system business. IBM will continue to own and produce all aspects of those systems from end to end, said Advani. "Nothing changes because of this deal."

IBM makes Intel-based servers, and while Lenovo may compete in that market, IBM has no plans to sell its server divisions, he said.

Reaction to the sale, announced early yesterday, has been mixed. Mobile Travel Guide CIO Paul Mercurio likens the PC to a telephone and doesn't see it as particularly consequential to IBM's long-term goals.

The PC is "not a strategic product in the way their servers are," said Mercurio, whose firm is an autonomous division of Exxon Mobile Corp. in Irving, Texas. He doesn't see the deal as a precursor to the sale of IBM's server business. "The serving of transactions is core to IBM's business," he said.

Members of Share, an IBM user group based in Chicago, have expressed concerns about the quality of PCs built by Lenovo, as well as the service and telephone tech support, said Robert Rosen, the president of Share. "These are the things that really touch the customer."

He said IBM's move may also affect government purchases of IBM products, but he agreed with Advani that it doesn't portend the sale of IBM's server divisions. Only the commodity business is affected, he said. "Every indication that we've gotten -- not a chance," he said of speculation that the servers may be next.

According to Gartner Inc.'s Dataquest, IBM has third place in the worldwide PC market, shipping 2.6 million units in the third quarter of this year, with 5.6% of the market. The leader is Dell Inc., with 7.9 million units shipped and a market share of nearly 17% for the same period, followed by Hewlett-Packard Co. at just over 7 million units and 15% of the market.

Ray Bjorklund, an analyst at Federal Sources Inc. in McLean, Va., said the federal agencies that may decide against purchasing from Lenovo will be those involved in national security, including the Defense Department, which account for about 60% of the estimated $60 billion the federal government is spending annually on IT. But other agencies may continue to buy IBM-branded PCs if "the price is extremely competitive and the machines work well. They will probably be happy to buy them," said Bjorklund.

Advani said IBM is already talking to federal agencies about the sale in an effort to reassure government buyers. "That is actually happening as we speak," he said yesterday.

One risk for IBM, said Tony Iams, an analyst at D.H. Brown Associates Inc. in Port Chester, N.Y., is that traditionally a vendor's sale of PCs will lead to sales of servers, or vice versa.

Advani said he isn't worried: IBM sales representatives will still be paid commissions for selling Lenovo-made PCs along with the servers, he said.

Some enterprise customers will be ruffled, but "I actually don't think it will be hard to reassure IBM's customer base," said Roger Kay, an analyst at IDC in Framingham, Mass. "There is a risk that customers will have all kinds of fears, but fear can be mitigated ... by facts and reassurance."

Copyright © 2004 IDG Communications, Inc.

7 inconvenient truths about the hybrid work trend
Shop Tech Products at Amazon