IBM's New Partner How the IBM-Dell alliance helps each company:
-- Further consolidates its suppliers of disk-drive, display and chip components, allowing it to reduce component acquisition costs
-- May lower the steep PC technology royalties it pays IBM as a result of its new patent cross-licensing and purchasing agreements
-- Creates a link with one of the top technology developers and could lead to further deals between the two
-- Secures the fastest growing PC company as a customer for its disk-drive, chip, display and networking technologies
-- Should substantially boost its current sales to Dell to an estimated $16 billion over the next seven years
-- Firmly positions the IBM component group as an independent supplier, free of any restrictions by IBM's PC or other computer units
NEW YORK -- International Business Machines Corp. agreed to sell Dell Computer Corp. $16 billion in parts over seven years, burnishing IBM's reputation in the technology market and further blurring the lines between competitor and ally in the computer industry.
The two companies -- fierce rivals for years in selling personal computers -- called the deal, which was announced here, the largest original-equipment manufacturing agreement ever reached in their industry. The deal positions IBM as a premier parts provider to one of the world's fastest growing computer firms. In exchange, people familiar with the matter said, Dell, based in Round Rock, Texas, receives reduced royalty rates on technology it currently licenses from IBM at what are believed to be steep prices.
IBM, of Armonk, N.Y., already sells Dell about $350 million a year in computer components, mainly data-storing disk drives. But if the companies' seven-year estimate is attained, that figure would rise to an average of $2.3 billion annually, as IBM adds incremental sales in disk drives, chips, computer screens and other electronics.
The deal underscores IBM's new strategic focus on selling high-tech components on the open market, rather than just using them inside IBM computers. The strategy has been advanced by IBM Chief Executive Louis V. Gerstner Jr., who sees it as another way to derive profits from IBM's technology prowess and keep the company competitive.
The approach has sometimes riled hardware units inside IBM, which feel that the strategy undercuts their ability to sell products by helping rivals build better ones. Mr. Gerstner sees this as a way to motivate the company's hardware units to remain competitive, analysts say. Although its new arrangement with Dell is somewhat akin to General Motors becoming Ford's main supplier, IBM said it believes it needs no federal antitrust clearance for the deal.
The agreement gives Dell access to IBM's vast research and development operations, plugging a hole in the PC maker's arsenal. The supply arrangement with IBM, one of the industry's technology leaders, should also help Dell as it seeks to move up-market into the higher-margin computer workstations and servers. Sales of these so-called enterprise systems accounted for about 15% of Dell's overall $18.24 billion of revenue last year, and the company faces stiff competition in that market from rivals including Compaq Computer Corp. and Hewlett-Packard Co.
The agreement boosted other technology companies and the entire stock market. IBM gained $4.25 to $171 in New York Stock Exchange composite trading. Dell, which trades on the Nasdaq Stock Market, gained 93.75 cents to $81.875. The news helped spark a rally in the Dow Jones Industrial Average, sending it up 191.52 points to 9467.40, though IBM's increase accounted for only 16.8 points of the rise.
The agreement isn't exclusive, which means Dell will continue to buy parts from other suppliers. But the arrangement could displace some of the companies that provide disk drives and other high-end components to Dell. Analysts said the two companies most likely to feel the heat are Seagate Technology Inc. and Maxtor Corp., which both sell disk drives to Dell.
Dell currently buys all of the disk drives it uses inside its stand-alone computer storage devices from Seagate, and now plans to use IBM as a second supplier, said Michael Lambert, head of Dell's enterprise systems unit. The deal also appears to reduce Maxtor's chances of becoming a leading supplier of disk drives for high-end computers such as workstations and servers. Maxtor already supplies disk drives for Dell's desktop PCs.
Seagate, of Scotts Valley, Calif., says it doesn't expect Dell's expanded use of IBM will affect its business with Dell. A spokesman said Seagate gets less than 5% of its $6.6 billion in storage revenue from Dell. A Maxtor spokeswoman said the Milpitas, Calif., disk-drive maker also expects no drop in Dell sales.
IBM and Dell said there are no contractual provisions that require Dell to spend $16 billion. But James T. Vanderslice, the IBM executive who negotiated the deal, said "there is a lot of strength" behind the $16 billion figure. Both companies said they anticipate Dell could actually spend more. Dell's sales grew at about 49% last year and are expected to rise more than 40% this year. Mr. Lambert said the deal creates an opportunity for IBM to become Dell's largest supplier of computer parts.
Mr. Vanderslice is the head of IBM's Technology Group, which was formed in October to rev up component sales to other companies. He first proposed a closer relationship with Dell during the summer, calling the vacationing Mr. Lambert in Hawaii. The discussions progressed quickly and the two companies agreed to expand purchases in November, Mr. Lambert said. The remaining time was spent by lawyers on details of the agreement.
On top of the purchase pact, Dell and IBM agreed to a patent cross-licensing agreement allowing them to use each other's technologies freely. Dell, whose portfolio of patents is dwarfed by IBM's, had been paying IBM large royalties to use PC technologies under a previous agreement.
Mr. Lambert said the arrangement will reduce the royalty percentage the company pays IBM, but he declined to discuss financial details. Don Young, an analyst with PaineWebber Inc., estimated the royalty decrease could save Dell as much as 1% of the price of each computer it sells.
Since 1993, IBM has built Mr. Vanderslice's original-equipment manufacturing unit into a $6.6 billion business. Analysts say it should grow to between $8 billion and $9 billion this year. The unit has also struck agreements to sell components to Sun Microsystems Inc., Apple Computer Inc. and Hewlett-Packard. Apple, for instance, uses IBM disk drives, chips and flat-panel screens inside its laptops.
Up until now, Dell had relied on IBM mainly for disk drives. Yesterday's deal means Dell will use IBM flat-panel computer screens, computer-networking chips and other microelectronics. Dell also expects to purchase IBM's newly developed microprocessors that use speedy copper wiring instead of traditional aluminum for use in some of its products.
But analysts don't expect the deal to bring a near-term increase in IBM's overall revenue. Gary Helmig, of SoundView Technology Group Inc., said he is maintaining his IBM 1999 revenue estimate of $87.6 billion.
Steve Milunovich, of Merrill Lynch & Co., expects IBM to seek similar deals with other rivals. He believes the new focus on components should provide a "fair amount" of additional revenue in the next several years.
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IBM's New Partner How the IBM-Dell alliance helps each company:
-- Further consolidates its suppliers of disk-drive, display and chip components, allowing it to reduce component acquisition costs
-- May lower the steep PC technology royalties it pays IBM as a result of its new patent cross-licensing and purchasing agreements
-- Creates a link with one of the top technology developers and could lead to further deals between the two
-- Secures the fastest growing PC company as a customer for its disk-drive, chip, display and networking technologies
-- Should substantially boost its current sales to Dell to an estimated $16 billion over the next seven years
-- Firmly positions the IBM component group as an independent supplier, free of any restrictions by IBM's PC or other computer units
NEW YORK -- International Business Machines Corp. agreed to sell Dell Computer Corp. $16 billion in parts over seven years, burnishing IBM's reputation in the technology market and further blurring the lines between competitor and ally in the computer industry.
The two companies -- fierce rivals for years in selling personal computers -- called the deal, which was announced here, the largest original-equipment manufacturing agreement ever reached in their industry. The deal positions IBM as a premier parts provider to one of the world's fastest growing computer firms. In exchange, people familiar with the matter said, Dell, based in Round Rock, Texas, receives reduced royalty rates on technology it currently licenses from IBM at what are believed to be steep prices.
IBM, of Armonk, N.Y., already sells Dell about $350 million a year in computer components, mainly data-storing disk drives. But if the companies' seven-year estimate is attained, that figure would rise to an average of $2.3 billion annually, as IBM adds incremental sales in disk drives, chips, computer screens and other electronics.
The deal underscores IBM's new strategic focus on selling high-tech components on the open market, rather than just using them inside IBM computers. The strategy has been advanced by IBM Chief Executive Louis V. Gerstner Jr., who sees it as another way to derive profits from IBM's technology prowess and keep the company competitive.
The approach has sometimes riled hardware units inside IBM, which feel that the strategy undercuts their ability to sell products by helping rivals build better ones. Mr. Gerstner sees this as a way to motivate the company's hardware units to remain competitive, analysts say. Although its new arrangement with Dell is somewhat akin to General Motors becoming Ford's main supplier, IBM said it believes it needs no federal antitrust clearance for the deal.
The agreement gives Dell access to IBM's vast research and development operations, plugging a hole in the PC maker's arsenal. The supply arrangement with IBM, one of the industry's technology leaders, should also help Dell as it seeks to move up-market into the higher-margin computer workstations and servers. Sales of these so-called enterprise systems accounted for about 15% of Dell's overall $18.24 billion of revenue last year, and the company faces stiff competition in that market from rivals including Compaq Computer Corp. and Hewlett-Packard Co.
The agreement boosted other technology companies and the entire stock market. IBM gained $4.25 to $171 in New York Stock Exchange composite trading. Dell, which trades on the Nasdaq Stock Market, gained 93.75 cents to $81.875. The news helped spark a rally in the Dow Jones Industrial Average, sending it up 191.52 points to 9467.40, though IBM's increase accounted for only 16.8 points of the rise.
The agreement isn't exclusive, which means Dell will continue to buy parts from other suppliers. But the arrangement could displace some of the companies that provide disk drives and other high-end components to Dell. Analysts said the two companies most likely to feel the heat are Seagate Technology Inc. and Maxtor Corp., which both sell disk drives to Dell.
Dell currently buys all of the disk drives it uses inside its stand-alone computer storage devices from Seagate, and now plans to use IBM as a second supplier, said Michael Lambert, head of Dell's enterprise systems unit. The deal also appears to reduce Maxtor's chances of becoming a leading supplier of disk drives for high-end computers such as workstations and servers. Maxtor already supplies disk drives for Dell's desktop PCs.
Seagate, of Scotts Valley, Calif., says it doesn't expect Dell's expanded use of IBM will affect its business with Dell. A spokesman said Seagate gets less than 5% of its $6.6 billion in storage revenue from Dell. A Maxtor spokeswoman said the Milpitas, Calif., disk-drive maker also expects no drop in Dell sales.
IBM and Dell said there are no contractual provisions that require Dell to spend $16 billion. But James T. Vanderslice, the IBM executive who negotiated the deal, said "there is a lot of strength" behind the $16 billion figure. Both companies said they anticipate Dell could actually spend more. Dell's sales grew at about 49% last year and are expected to rise more than 40% this year. Mr. Lambert said the deal creates an opportunity for IBM to become Dell's largest supplier of computer parts.
Mr. Vanderslice is the head of IBM's Technology Group, which was formed in October to rev up component sales to other companies. He first proposed a closer relationship with Dell during the summer, calling the vacationing Mr. Lambert in Hawaii. The discussions progressed quickly and the two companies agreed to expand purchases in November, Mr. Lambert said. The remaining time was spent by lawyers on details of the agreement.
On top of the purchase pact, Dell and IBM agreed to a patent cross-licensing agreement allowing them to use each other's technologies freely. Dell, whose portfolio of patents is dwarfed by IBM's, had been paying IBM large royalties to use PC technologies under a previous agreement.
Mr. Lambert said the arrangement will reduce the royalty percentage the company pays IBM, but he declined to discuss financial details. Don Young, an analyst with PaineWebber Inc., estimated the royalty decrease could save Dell as much as 1% of the price of each computer it sells.
Since 1993, IBM has built Mr. Vanderslice's original-equipment manufacturing unit into a $6.6 billion business. Analysts say it should grow to between $8 billion and $9 billion this year. The unit has also struck agreements to sell components to Sun Microsystems Inc., Apple Computer Inc. and Hewlett-Packard. Apple, for instance, uses IBM disk drives, chips and flat-panel screens inside its laptops.
Up until now, Dell had relied on IBM mainly for disk drives. Yesterday's deal means Dell will use IBM flat-panel computer screens, computer-networking chips and other microelectronics. Dell also expects to purchase IBM's newly developed microprocessors that use speedy copper wiring instead of traditional aluminum for use in some of its products.
But analysts don't expect the deal to bring a near-term increase in IBM's overall revenue. Gary Helmig, of SoundView Technology Group Inc., said he is maintaining his IBM 1999 revenue estimate of $87.6 billion.
Steve Milunovich, of Merrill Lynch & Co., expects IBM to seek similar deals with other rivals. He believes the new focus on components should provide a "fair amount" of additional revenue in the next several years.
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