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Technology Stocks : IBM -- Ignore unavailable to you. Want to Upgrade?

To: Jonathan Edwards who wrote (7589)	4/9/2002 9:49:59 AM
From: Arrow Hd.	Read Replies (1) \| Respond to of 8218

Hi Jonathan, there are two thoughts here. --The first is that IBM's OEM business is comprised of "pieces" of technology like chips, drives, IP, etc. and they sell this to other tech firms which use these pieces in their products so if this business is down so significantly it is a good indicator that the health of the tech industry is still poor and did not recover in the first quarter. I am sure you were aware of that though. --The second is the P&L issue which is your real question I believe. When a product is developed, such as the Shark drive families or one of the Servers, the conservative assumption during the initial business phase is that the target product has to incur all of the costs. It assumes there will be no OEM opportunities for selling the pieces. This excludes of course the contract chip manufacturing where an OEM spec is designed for a specific non-IBM customer. Anyway, the full R&D, SG&A (sales, general and administrative costs), warranty, etc. has to be cost recovered on a "fully apportioned" basis which means everything that is an expense that is associated with the product plan. That would include you if you were a microcoder or a systems control programmer. If the product can withstand this scrutiny then the product plan moves forward. Lets say everything works out and the IBM product is now on the market and it is using a really neat internal disk drive which stores the systems programming and HP comes forward and says to IBM they would like to buy that internal drive on an "OEM" basis non-logo'd. Certainly IBM would entertain that deal but how would they price it and what expenses would have to be cost recovered. Lets look at the expenses first. Most of them have already been accounted for in the IBM product since a fully apportioned methodology has all of those expenses written against the life of the IBM product so they don't have to be taken against the OEM deal since that would be double accounting. For example, they are not going to account for your salary and benefits twice. So what is left. The OEM methodology would be responsible for their level of SG&A, some engineering work which would be charged out to the buyer, and some level of corporate overhead coverage, among other things. In other words, the OEM methodology has the opportunity to be obscenely profitable. Or, it can be assigned some level of the IBM product cost/expense and be less profitable but again, due to no double accounting that leaves less cost/expense for the IBM product to absorb so it becomes more profitable. So the cost/expense allocation methodology gives the company the opportunity to balance the methodologies which is generally a good game plan because if you leave too much margin in one of those products the temptation is to deep discount it away to the buyer leaving IBM with less than it could have received. Sorry for the long-winded discussion but it is actually a rather complicated and contentious process to explain in a few words.