Update: IBM's PC business up for sale

IBM has put its PC business up for sale, according to a story published on Friday on the Web site of The New York Times.

IBM is discussing selling the business to Lenovo Group (formerly Legend Group), China's largest maker of personal computers, and at least one other potential buyer, according to the article. The price of the sale and the status of the negotiations were not mentioned.

A spokeswoman for IBM in Japan declined comment on the story and a spokeswoman for Lenovo in Hong Kong had no immediate comment. A U.S. spokesman for IBM, Clint Roswell, also declined comment.

A sale would take Armonk, New York-based IBM out of the home computing market it popularized with its 1981 release of the IBM Personal Computer. Hardware was the foundation of IBM's business until Lou Gerstner arrived as the company's chief executive officer (CEO) in 1993 and revived its fading fortunes with a transition to software development and services work. Beginning in 1998, IBM's revenue from software and services eclipsed hardware.

IBM has already pulled back from the commoditizing PC market. In 2002 it signed a $5 billion, three-year agreement to outsource most of its desktop PC production to San Jose, California-based Sanmina-SCI; late that year it sold its hard disk drive business to Hitachi. But while financial analysts called for IBM to entirely shed its low-margin PC business, executives including CEO Sam Palmisano resisted, arguing that IBM's strength comes from its sweeping product portfolio. Retaining a presence in the PC market helps IBM better serve customers seeking end-to-end providers with broad expertise, the company's management said.

If IBM is going to alter that strategy and leave a challenging market, it appears to have timed the move well. In a Nov. 29 report, Gartner predicted that three of the world's top 10 PC vendors would sell their businesses or pull out of the market by 2007 because of slower growth rates and reduced profit margins. It specifically cited IBM's PC division, along with Hewlett-Packard's, as vulnerable to being spun off.

"We forecast at least three lean years for the global PC market after 2005," Gartner wrote. "In these years, unit growth will fall below the double-digit rates the market is accustomed to, and revenue growth will come to a virtual standstill."

Research firms Gartner and IDC both place IBM in the number-three spot, by unit shipments, among PC makers. Leading the pack is Dell, the only consistently profitable PC vendor over the last several years. HP holds the No. 2 position. IDC pegged IBM's shipments in the second quarter of this year at 3.2 million PCs globally.

"IBM likes to be number one and sometimes number two in a business. They don't like No. 3 very much," noted analyst Rick Doherty of The Envisioneering Group.

IBM CEO Palmisano has promised investors he will continually monitor IBM's business units and repair or get rid of those that don't fit into IBM's strategy of only competing in markets where it can dominate or innovate, Doherty said. Leaving the PC market would fit into that overall corporate strategy. Also, IBM has for years had manufacturing ties to Lenovo and other Chinese companies.

"It's not such a stretch to make their largest partner the owner," he said.