IBM to vacate the PC business? Even if it only outsources manufacturing, who will benefit most - DELL or COMPAQ?
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March 25, 1999
IBM Discloses PC Pretax Loss
Of Nearly $1 Billion Last Year
By WILLIAM M. BULKELEY
Staff Reporter of THE WALL STREET JOURNAL
International Business Machines Corp. disclosed a pretax loss of nearly $1 billion from its personal-computer business last year, prompting renewed calls for the company to get out of the highly competitive PC market.
Although IBM's overall earnings rose last year and its PC unit was widely assumed to be in the red, the company has never divulged the extent of the loss before. The disclosure, made in IBM's annual report under a new accounting rule, brought into sharp relief the issue of the PC unit's future at a time when competitors have been gaining market share and IBM has been stressing other lines.
Steven Milunovich, an analyst at Merrill Lynch & Co., hailed IBM's segmented disclosure as evidence of the company's strength in software and services, both of which gained last year. But "we recommend that IBM exit the desktop and consumer PC businesses," Mr. Milunovich added. Don Young of PaineWebber Inc. also called for an IBM exit, saying "it would enhance the amount and quality of earnings."
Company Profile: International Business Machines
Separately, IBM struck a disk-drive supply deal with EMC Corp., of Hopkinton, Mass., which competes with IBM in selling large computer-storage systems. EMC agreed to buy $3 billion of IBM-made disk drives over five years as parts for its storage systems. EMC will also evaluate other IBM technology in return for an agreement that gives EMC engineers access to IBM's patents.
IBM, EMC Shares Gain
IBM shares climbed $4.125 to $169.50 in New York Stock Exchange composite trading, while EMC gained $5 to $118.875.
Michael Ruettgers, chief executive of EMC, said IBM is positioning itself more to emphasize software, services and components. Mr. Ruettgers said he believed it likely that IBM would eventually outsource its PC operations to Dell Computer Corp. Two weeks ago, IBM reached an agreement to be a major supplier of parts to Dell in a deal it predicted would generate sales of $16 billion over seven years.
However, an IBM spokesman said "we remain committed to the PC business," including manufacturing and distribution, although IBM already outsources some PC manufacturing to Taiwan's Acer Inc. He said most of the 1998 losses occurred in the first half, when a glut of PCs in dealer channels led to painful price cutting. The spokesman said the PC unit was profitable in the fourth quarter.
IBM's pretax PC loss of $992 million last year compared with losses of $161 million in 1997 and $39 million in 1996. IBM's net income in 1998 rose to $6.31 billion from $6.07 billion in 1997, bolstered by a 30% pretax earnings gain from services, to $3.76 billion, and a 27% pretax rise in software earnings, to $2.59 billion.
IBM Chief Executive Louis V. Gerstner, in his letter to shareholders, called IBM's PC business "an important turnaround story in 1998," alluding to the fourth-quarter comeback. However, Mr. Gerstner also said that "the PC era is over," with computer networks becoming the main "driver" of customer purchases and new software applications. International Data Corp., a market-research firm, released a report Wednesday showing that IBM was No. 4 in U.S. PC shipments last year, behind Compaq Computer Corp., Dell and Gateway Inc. World-wide, IBM was No. 2 behind Compaq.
Outsourcing Issue
Observers generally believe a sale of IBM's PC unit is less likely than outsourcing some or all of the unit's manufacturing, allowing IBM to put its label on a box made elsewhere, as Unisys Corp. and NCR Corp. have done.
John Jones, an analyst at Salomon Brothers, said, "I think they'll stay in the PC business.... I don't know how you can be a full-service" information-technology supplier "and not have a contribution in the PC segment which is 25% of the IT market." IBM's PC losses reflected vicious price cutting by wholesalers and retailers last spring as they struggled to be competitive with Dell and Gateway, which sell directly to customers. PC makers who sell through distributors or retailers, including Compaq and Hewlett-Packard Inc. also suffered huge losses at the time, analysts say.
The EMC pact announced Wednesday solidified IBM's relation with the storage maker. It also prompted shares of Seagate Technology Inc., another disk-drive supplier to EMC, to drop $2.125 to $26 in New York Stock Exchange composite trading Wednesday. A Seagate spokeswoman said the company anticipates no fall-off in sales to EMC.
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