zdnet.com
from ZDNET, 4 March 1998
* (Poster's Note: my comments are preceded by an '*')
Dell, IBM announce $16B alliance
IBM will have access to Dell's build-to-order process.
By Anne Knowles, PC Week
March 4, 1999 10:22 AM PT
IBM Corp. will gain access to the brains behind Dell Computer Corp's much coveted build-to-order process as a result of the $16 billion deal the two companies announced early Thursday.
* wsrn.com from WSRN, that is more than 87% of the $18.2 billion that DELL had in total revenues for the entire past year.
* so how is DELL paying that sum: in the form of purchasing IBM components and equipments, or in cash?
The agreement includes a broad patent cross-licensing contract between the computer makers. IBM (NYSE: IBM), which officials say has been granted more patents than any other company for the last six years, has plenty of technology to offer Dell (Nasdaq: DELL).
* Note the "cross-licensing". Many DELL detractors claim that DELL is 'merely' a parts assembler. Followers of the DELL threads know that DELL possesses numerous patents of its own, some of which must be fairly valuable or key if IBM is willing to share its much larger libraries to gain access.
* Alternatively, the cross-licensing may be merely the framework which allows the technicians of the two companies to work together to determine the best synergies available from the joint intellectual holdings.
But that left observers wondering what Dell, which spent just 2 percent of sales on research and development in 1998, had to offer in return.
* Perhaps IBM is planning on a capitulation, a withdrawal from the PC construction business, transferring both the assembly and sales to DELL, with the possibility of DELL producing IBM PCs or with a DELL PC becoming the desktop component of IBM's larger systems.
* DELL may merely assist IBM in streamlining and making its manufacturing, materials ordering, and assembly processes more effective. But in that case, IBM would be paying DELL.
"We have [intellectual property] around our build-to-order process," said Peter Scacco, a spokesman for Dell in Round Rock, Texas.
* Obviously important, or he would not have deliberately mentioned it.
For years, Dell's build-to-order and distribution process has been the envy of the industry, and other PC OEMs, including IBM, have been unable to emulate it despite their best efforts.
* We suspected that. ;-} But not just this industry.
Under the terms of the seven-year deal, the two companies will work to develop customized products for Dell. According to Scacco, that will include fine tuning products to optimize them for assembly on Dell's manufacturing line.
* Remember the HBR article? DELL is constantly reviewing its customers' want lists, and working to meet them.
* What patents does IBM hold which are key to meeting DELLs (and IBMs) customers' needs?
Dell's buy list
As part of the deal, Dell will buy IBM storage products, semiconductors, networking equipment and display technology. Included in the storage products will be high-capacity disk drives for servers and possibly IBM's Microdrive, a tiny 340MB drive due by midyear and destined for digital cameras, handheld computers and other devices.
* Is this the $16 billion-purchases? Is that why the near-term effect will be minimal, but the synergies and joint technology products will become an increasing part of DELL's future procurement?
* How will this impact the current price and expectations of SEG, WDC, etc? IMO there will be serious additional pricing pressures on suppliers who compete with IBM products.
Semiconductor technology will include SRAM (Static random access memory), custom chips and future IBM chips using copper and silicon-on-insulator technology, which will be used in a broad range of chip products.
Dell and IBM officials stressed that the deal does not include microprocessors. Currently, Dell uses only Intel Corp. processors.
* What is not, may become. If IBM were to develop a copper chip which gave comparable or better performance when compared to Intel processors at a reduced cost, I think that IBM would definitely have to be considered as a source.
"I don't see how this will have an impact [on Intel]," said Jim Vanderslice, senior vice president and group executive with the IBM Technology Group in Somers, N.Y., during the announcement. "There is little, if any, conflict."
Both sides emphasized that today's deal may be a harbinger of a much larger agreement that could encompass, among other things, IBM services.
Just a start
"This is just the beginning," said Mike Lambert, senior vide(sic) president for Dell's Enterprise Systems Group. "This may be a better partnership than those numbers suggest.""
* I can see tremendous synergies. I am concerned that the price is very high, and have not seen data regarding how payment is to be made.
This is an ambitious undertaking," said Vanderslice. "I've made a lot of sales calls in my life, but few where we've closed $16 billion."
IBM's OEM business has had 40 percent annual compounded growth in its six years, from $200 million in 1993 to $6.6 billion last year.
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