The implications of this deal get BIGGER and BETTER the more I think about it.
Fez
____________________________________
Friday March 5 6:02 PM ET
Analysts See Further IBM-Dell Ties In Wake Of Pact
By Eric Auchard
NEW YORK (Reuters) - IBM stock surged another $6 Friday, a day after it announced its $16 billion mega-manufacturing pact with Dell Computer Corp. (Nasdaq:DELL - news), and analysts speculated how the move could lead to further ties.
IBM stock moved higher again Friday, closing up $7.75 at $178.375 in New York Stock Exchange trading, on top of a $4.25 gain Thursday when the deal was announced. Dell stock rose a further $4.19 to $86.06 in Nasdaq trading Friday after a 94-cent gain the prior day.
Amit Chopra, a securities analyst at brokerage CS First Boston, estimated the seven-year deal could add $9.5 billion in incremental revenues for IBM. The deal's total value in new and existing contracts was $16 billion, the companies had said.
Merrill Lynch analyst Steve Milunovich projected the deal could add 50 cents to IBM earnings per share in a few years, with a half to two-thirds of the $16 billion in new business.
Terms of the deal call for IBM to supply Dell with a range of computer components like disk drives, chips, network attachments and monitors for use in Dell PCs.
Milunovich said the agreement could accelerate IBM's exit from the business of making personal computers -- a business it largely invented.
''We believe IBM is taking a 'show me' attitude toward its PC division, making it prove its stripes,'' he wrote in a research note of how IBM's pact with Dell, a rival PC maker, puts pressure on IBM's PC division to succeed on its merits.
The analyst estimated that two-thirds of the value in a personal computer are in making the components, not in assembling the complete PC box. ''IBM can participate without making the box,'' Milunovich said.
In a research note, Chopra said that, with pricing in its traditional mainframe business declining, IBM's component supply business is playing a growing role in fueling the company's revenue growth.
''IBM has found a new distribution channel for its (research & development) investments, giving us greater confidence in the company's ability to grow its top line,'' Chopra wrote.
Chopra said the deal was the strongest stimulus to the stock since IBM's fourth quarter revenue report, when quarterly revenue growth fell short of Wall Street estimates, causing the stock to slide sharply, and trade in a range since then.
He said that while other PC makers have been slammed by signs of sales weakness in the first two months of 1999, IBM's PC business appeared to be on track and that the PC group is making rapid progress on direct distribution of PCs, which he estimated could amount to 30 percent of shipments by year-end.
In a research note entitled ''IBM/Dell Pact -- The Best is Yet to Come,'' Piper Jaffray analyst Ashok Kumar said the deal gives Dell access to IBM's research and development and patents without paying the customary 1 percent royalty fee.
Kumar argued the manufacturing pact is a possible prelude to Dell signing up with IBM's Global Services division, arguing that Dell's current computer services partners, Unisys Corp. . and Wang Global are not capable of providing the range of corporate-wide services Dell will require.
''We consider this an initial engagement opportunity with the potential to provide services in the future,'' Kumar said.
He also speculated that Dell could takeover the manufacturing of IBM PCs, similarly to the way Unisys now resells Hewlett-Packard Co. PCs, after Unisys exited the manufacturing of mass-market computers last year.
Merrill's Milunovich agreed the Dell deal may accelerate IBM's decision to exit the consumer and corporate desktop PC business and instead sell PCs built by Dell or another maker.
|
