updated 12/3/2004 1:09:46 PM ET 2004-12-03T18:09:46

International Business Machines Corp. has reportedly put its personal computer business for sale in a deal that could fetch as much as $2 billion and close an era for an industry pioneer that long ago shifted its focus to more lucrative segments of the computer business. Its stock rose nearly 2 percent in midday trading in the wake of the report.

The New York Times reported Friday that IBM is in serious discussions with the Lenovo Group, China’s biggest maker of personal computers, and at least one other unidentified prospective buyer for the unit.

The newspaper cited anonymous sources close to the negotiations.

IBM spokesman John Bukovinsky refused to comment Friday. Spokesmen at Lenovo’s Beijing headquarters and Hong Kong offices did not return calls Friday.

Analysts have said a sale of the PC business would make sense for IBM.

Ben Reitzes, an analyst at UBS Investment Research, said in a July research note that the business could be sold. He noted the PC business accounts for about 10 percent of IBM’s total sales.

Its profits have been slim. Morgan Stanley said IBM’s PC business contributed less than 1 percent of the company’s earnings per share.

It would make sense for an Asian computer maker to buy the business, since they face intensified competition from the PC industry leader Dell Inc. “By linking up with a heavyweight like IBM, vendors would logically think they could fend off any threat better,” Reitzes said.

IBM sees future in services
IBM is increasing its focus on consulting and outsourcing services and software, analysts said.

“They’ve been very clear that they intend to streamline and prioritize around new growth opportunities,” said Mark Stahlman, technology strategist at research firm Caris & Co. “PCs are not one of them.”

Some worried that selling the PC business would give IBM less leverage to “upsell,” the term for a computer makers’ ability to sell services and software to its hardware customers.

“IBM needs to make sure they protect the upsell opportunity,” Reitzes said.

While IBM designs all its PCs, the company no longer makes PCs at any plants it owns alone.

Instead, all its PCs are either produced through joint ventures or outsourced to other manufacturers. IBM has deals with equipment makers Solectron Corp., Sanmina Corp., Wistron Corp. and Quanta Computer Inc. Sanmina bought the last company-run PC plant in 2003.
Armonk, N.Y.-based IBM was a major force in driving personal computing into the mainstream with its introduction of the IBM PC in 1981.

As personal computers shrunk in size and price, they became fixtures on the desks of everyone from college students to NASA scientists. Before the PC, the only way to complete computer-level computations was by using a mainframe computer — machines that could take up entire rooms and were so expensive, only the biggest companies and wealthiest universities could afford one.

But competition has driven down prices.

The executives in charge of corporate technical systems are under pressure to keep costs low, said Eric Johnson, director of the Center for Digital Strategies at Dartmouth University’s Tuck School of Business.

“PCs are beginning to look more like pencils to them; they are just a commodity appliance,” he said.

IBM’s sales from personal computers, printers and point-of-sale terminals increased 17 percent in the first nine months of the year, driven by strong sales of its ThinkPads.

But 2003 was tougher. Sales were up 3.1 percent in 2003 versus 2002, according to the company’s annual report. The increase was entirely due to the weak dollar, which improved sales abroad. Factoring out the weak dollar, sales fell 2.5 percent.

Revenues for personal computers decreased because prices for the computers continue to fall, the report said.

IBM ranks third behind Dell of Round Rock, Texas, and Hewlett Packard Co. of Palo Alto, Calif., in the personal computer business, according to Gartner Inc., a Stamford-based provider of research and analysis on the information technology industry.

The Times said the business up for sale would include the entire range of desktop, laptop and notebook computers made by IBM. The sale would likely be in a range of $1 billion to $2 billion, the report said.

Other possible buyers could include Japan’s Toshiba Corp., analysts said.

Chinese company focuses on PCs
Guo Tongyan, a Lenovo marketing manager in Beijing, said he had not heard of any discussions, but noted Lenovo was building up its personal computer business.

Last month, China’s state media said Lenovo and IBM were discussing teaming up to make desktop personal computers.

Asked about The Times report, Guo replied: “If Lenovo wanted to further expand its PC capacity, I wouldn’t be very surprised.”

“We decided on a strategy of 'reinforcing the PC business, focusing on the PC business’ in a strategic meeting early this year,” said Guo, who heads Lenovo’s northern China marketing department.

Lenovo, formerly called Legend, had begun expanding into mobile phone manufacturing and information technology services when its computer manufacturing business faced intense competition from foreign rivals such as Dell.

But after reporting worse-than-expected results last year, Lenovo said it would return its focus to its core computer business.

Lenovo is the world’s ninth-biggest computer maker by size of shipments.

If IBM sells the business, one company that may feel pressure is competitor Hewlett Packard, whose CEO, Carly Fiorina has been “defending their PC business for years,” Dartmouth’s Johnson said.

“The argument has been that you need that branded white box to stay on the top of mind of Fortune 500 chief information officers,” he said. “What IBM is saying is that’s not so important anymore.”

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