IBM Set To Unveil Deal To Sell PC Business To Lenovo

If the deal is consummated after the due diligence phase, which could take four months, Lenovo will manufacture and market IBM-branded PCs and notebooks through current IBM channels, including IBM's direct-sales force, sources said. The pact doesn't include IBM servers.

IBM wasn't available for immediate comment.

The sale will effectively transfer most of the IBM PC division's employees to Lenovo. Sources said it's likely that Stephen Ward Jr., the current senior vice president and general manager of IBM's Personal Systems Group, will head the new Lenovo unit. In 2003, IBM's Personal Systems Group reported a loss from continuing operations of $118 million on sales of $11.5 billion.

Lenovo, formerly known as Hong Kong Legend, is one of the largest China-based computer companies. It was established and began distributing computers, including IBM systems and Hewlett-Packard printers and peripherals, about 20 years ago.

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Low-cost manufacturing, coupled with IBM's strong brand, could result in a new, lower-priced and more competitive alternative to Dell and HP, sources said.

Industry executives characterized the deal as just one leg of IBM's long march away from commoditized, low-margin computer products into more strategic consulting and services focused on specific vertical industries.

"IBM giving up on these businesses--first hard drives, now PCs--is like the Japanese retreat in the Pacific, one island at a time," said Jeff Matthews, general partner of Ram Partners, a Greenwich, Conn.-based hedge fund. Matthews said to watch for IBM to offload its microelectronics business next. "This is just a total commoditization of the hardware business to Asia," he said. "It started with chips. Now it's moved to big boxes, and it won't end with PCs."

The fact that IBM will retain servers--for now, at least--isn't surprising, Matthews said. "Servers aren't quite there yet commoditywise, but as the Wicked Witch told Dorothy, 'All in good time,' " he said.

A midmarket solution provider who didn't want to be identified said the deal is consistent with IBM Chairman and CEO Sam Palmisano's strategy of moving the company out of commodity products and into more strategic consulting and services. That's all part of IBM's transition to services, taking the "high road" in corporate enterprises, the solution provider said.

IBM's exit from the PC business may part the clouds for a Dell-take-all scenario, financial analysts said.

"Down the line, Dell is winner-take-all, and IBM just saw the writing on the wall," said one Wall Street trader, who requested anonymity.

Brian Bolan, vice president of equity research at Chicago-based Marquis Investment Research, agreed. "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, adding that IBM aims to transform itself into "a services-based company that is hardware-agnostic so they can come in and help anybody with anything."

VARs will continue to support IBM PCs for the time being, Bolan added.

"Going forward, the VARs out there will pretty much be saying to their IBM PC customers, 'We will still provide service for you. We will just make sure we get the compatibility issues worked out,' depending on where they go for PCs," he said.

BARBARA DARROW and DAN NEEL contributed to this story.