IBM's Landmark Deal

Barring any last-minute hiccups, sources confirmed that IBM could announce early this week an agree- ment in principle to sell its PC business, including desktops and notebooks, to China's PC giant Lenovo, formerly known as Hong Kong Legend.

If the deal is consummated after a due diligence phase, which could take up to four months, Lenovo would end up manufacturing and marketing IBM-branded PCs and notebooks through current IBM channels, including IBM's direct sales force, the sources said. The pact would not include IBM servers.

According to sources, the deal on the table would effectively transfer the majority of IBM's PC-related employees into Lenovo, and Stephen Ward, senior vice president and general manager of IBM's Personal Systems Group, is in the running to head the new organization. The group has been profitable for the past several quarters, but reported a loss of $118 million in 2003 from continuing operations on sales of $11.5 billion.

IBM and Lenovo were unavailable for comment. Solution providers said if Lenovo, a low-cost manufacturer that has done contract manufacturing for IBM, mounts a channel-friendly effort with the IBM brand, the deal could provide a new lower-priced alternative to Dell and Hewlett-Packard.

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On the other hand, if Lenovo mounts an aggressive direct-sales offensive, it could present challenges for partners that have been selling IBM systems as a strong value alternative, while shoring up vendors such as Acer America or Toshiba that offer other options for the channel.

"If they [Lenovo] keep the R&D and the IBM brand, it could change the competitive landscape in the PC business from a price perspective," said Gary Shottes, vice president of marketing and business development at Amherst Technologies, a solution provider in Merrimack, N.H., that currently does about $15 million in IBM business annually. "Selling the IBM brand with a 30 percent to 40 percent reduction in [manufacturing] costs could change the game against Dell and HP overnight."

John Marks, CEO of JDM Infrastructure, a Rosemont, Ill.-based reseller that does millions of dollars a year in IBM business, said that the deal "could potentially be a huge win for the channel" if it opens up accounts that have been purchasing PCs and notebooks direct from IBM.

"If the quality of the products stays the same and they cut the price significantly, it is going to have a big impact on Dell and HP. I am sure Dell and HP are in high-level meetings trying to figure out how to combat Lenovo," he said.

The key for Lenovo would be to keep the integrity of the IBM products and channel programs intact, Marks said. "They have a wonderful opportunity to take an established channel player and make it even better," he said, while cautioning that there is big chance for negative fallout, including the loss of key IBM channel representatives who have provided strong support for resellers like JDM.

The big short-term problem many solution providers face is the potential that news of the expected deal could kill millions of dollars in IBM business in the pipeline. "I figured this would happen, but it concerns the hell out of me," said Joe Vaught, COO of PCPC, an IBM solution provider in Houston, who noted that Lenovo has been manufacturing IBM systems for some time. "I have so many huge deals hanging within hours of closing with laptops and desktops, and I bet they may not close now. These folks won't buy now. Dead in the water."

Vaught said IBM desktop and laptop sales account for about 10 percent of his business, down from 70 percent five years ago.

The news could have particularly thorny implications for Ingram Micro's VentureTech Network (VTN) members who have embraced the IBM product line in recent years. IBM has boasted that its share of PCs, notebooks and servers among VTN members has increased to 59 percent from 22 percent two years ago.

John DeRocker, a VTN board member and senior vice president of sales and marketing at Nexus Information Systems, a Plymouth, Minn.-based solution provider, said if the sale goes through without heavy IBM involvement, it could be a big mess.

"The worst thing that could happen is Lenovo goes direct against Dell to take market share, and all the resellers that have IBM business lose that business," said DeRocker. "That is a huge pitfall. The best thing that could happen is they leverage the channel, retain the IBM name, and it is more of divisional shift. Then VTN members will still get to close their deals."

Jeffrey Sherman, president of Warever Computing, a Los Angeles-based solution provider, said the expected deal could be good news for custom-system builders "since this seems to eliminate about the only brand-name competition that was channel-friendly. I see this as a terrible thing for the industry," he said.

Industry executives characterized the development as just one leg of IBM's long march away from low-margin, commoditized computer products into strategic consulting and services focused on specific vertical industries. The move would give IBM competitors an opportunity to approach accounts that have been loyal IBM notebook and desktop shops and win them over, they said.

Lenovo is one the largest computer companies in China. It was established 20 years ago and began distributing products such as IBM systems, HP printers and peripherals.