PC Business Sale Could Cost IBM, Some Wall Street Analysts Say - InformationWeek

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PC Business Sale Could Cost IBM, Some Wall Street Analysts Say

IBM's plans to divest its PC business could be a mistake, some Wall Street analysts said Friday.

IBM's plans to divest its PC business could be a mistake, some Wall Street analysts said Friday.

The Armonk, N.Y.-based IT giant next week is expected to announce that it has agreed to sell its $11.5 billion PC business to China-based PC vendor Lenovo, according to sources. IBM executives couldn't be reached for comment.

Even though IBM trails rivals Dell and Hewlett-Packard in the PC market, not having its own PCs for sale may cost Big Blue more in the long run, several financial analysts said.

"The PC business is a business IBM should keep. I think [selling that business] could be a mistake," said Jay Arnold, a small-cap portfolio manager at Abacus Asset Management. "PCs are a very small part of IBM's business. They could give them away if they wanted. Even Dell doesn't make money on everything they sell, and sometimes you have to do that. Without PCs, IBM may lose sales on other product lines. Sometimes you have to have PCs so you have a full-service line."

IBM pioneered the PC more than two decades ago, but in recent years it has seen the fortunes of its PC business fall to Dell and HP. Dell tops the PC market with a 32.8 percent share, followed by HP (20.5 percent), Gateway (5.3 percent) and IBM (5.3 percent), according to IDC. The research firm said Gateway beat IBM for the No. 3 spot by only a few thousand more units sold.

Some reports Friday said the IBM/Lenovo deal would be a joint venture, which would allow IBM to retain its PC business to some degree. One Wall Street analyst, who requested anonymity, said IBM would be taking a risk if the company completely disenfranchised itself from the PC business.

While IBM's possible sale of its PC business would boost its return on investment capital, a joint venture that would enable IBM to keep some part of its PC business under its control would be preferable in the long run, according to a report released Friday by Steven Milunovich, first vice president, and Richard Farmer, assistant vice president, at Merrill Lynch, New York.

"There is some risk that IBM's corporate account control could be hurt to the benefit of HP and Dell," Milunovich and Farmer said in the report. "We think that IBM may still want to distribute an IBM-branded PC. In other words, Lenovo could provide IBM with a PC that says 'IBM' on the front. This would mitigate the expected revenue decline for IBM."

If IBM exits the PC arena altogether, that would be a big win for Dell, analysts said. "Down the line, Dell is winner-take-all, and IBM just saw the writing on the wall," said one Wall Street analyst, who asked not to be identified.

Brian Bolan, vice president of equity research at Marquis Investment Research said the PC business "has already been marginalized" by Dell and HP. "The only thing that IBM has left is its corporate servers and the services business that goes on top of that. Gateway has already diversified away from PCs and into the plasma screen business," he said.

In early afternoon Friday trading, IBM's stock price climbed 1.6 percent, but several analysts said it was difficult to say if the gain came from the news of the possible sale of IBM's PC unit. They noted that Intel issued a strong earnings statement late Thursday--a positive sign for the computer industry as a whole--and that both Dell and HP share prices rose Friday as well.

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