IBM Selling PC Unit Makes No Sense

Following is commentary from Rob Enderle, Principle Analyst at the Enderle Group.

There are three strong reasons why the alleged sale of IBM's PC unit to Lenovo makes no sense: The property is worth more to IBM then it is to Lenovo; the Thinkpad Notebook line is one of the most powerful marketing tools IBM has; and the sale would put IBM at a greater disadvantage against Dell and HP. Let's take a look at each argument in turn while keeping in mind that just because something makes no sense has seldom stopped stupid decisions from being made.

The PC Company Is Worth More To IBM
IBM sells PCs direct and much of the value to the buyer is connected to the trust they have for IBM and the IBM brand. Unlike IBM Software and IBM Microelectronics, which are less valuable to IBM then they would be as independent units, the IBM PC company is upside down for a sale. For a sale to work, the value of the property must be of equal or greater value to the buyer in order to sell. IBM PC Co., which outsourced much of this work some time ago, provides quality assurance, designs, and the connection to IBM services which often provides critical installation and management help. Without those parts, and particularly without the IBM brand, between 50% and 75% of the existing customer set would move to other vendors.

IBM's value is based on current revenue, while the value to the buyer would be based on the revenue they could expect and the difference should create a gap where the buyer would be unwilling to pay more than half what IBM felt the unit was worth.

The ThinkPad Notebook: IBM's Strongest Marketing Tool
Think: How do most people, see the IBM brand in use? Typically, it is through seeing someone else using an IBM notebook, recognizing that Big Blue logo on the unit's cover. Executives, board members, educators and other critical IBM advocates use and see these products every day and think positive thoughts about IBM. That is marketing, and given the level of some of these executives, very powerful marketing. Think how much it would cost to have any brand put in front of this class of qualified audience. Once the product left IBM, just to stay even, IBM would have to spend millions on marketing programs that wouldn't have anywhere near the repetitive impact the IBM brand has on its notebook line. Louis Gerstner, on his retirement, said that taking the PC Company out of retail was his biggest mistake. I'd say that if his successor makes this decision, it's clearly the front runner for his most foolish move.

A Christmas Present For Dell And HP
Dell and HP move against IBM by implementing affinity programs, these are programs where employees can buy the consumer products these companies sell at pre-negotiated discounts that also lower the cost of products that the corporation buys. IBM, Dell, Gateway, and IBM move against Toshiba by convincing buyers to bid desktop and laptops products together locking out Toshiba which just sells desktop products. Dell has been particular successful up-selling PC accounts into servers and then bundling the entire thing together into an effective package. IBM's exit from this market would not only allow these same strategies bundling strategies to be used by IBM's competitors to displace IBM servers, but they could point out that the loss of the PC business is just a precursor to other divestitures creating substantial opportunity in IBM's soon to be ex-customer base.

However, all of that doesn't mean IBM won't do it. IBM is led by a CEO who spent much of his time in sales; sales executives are trained to think tactically and, obviously, sell things. If he sells this unit there will be some initial revenue and margin benefits. However, these will be quickly overtaken by growing strategic problems that have a high likelihood of creating the same problems that put IBM in decline in the 80s. IBM's top execs would do well to mind the adage, "those that fail to learn from history are cursed to repeat it." That's because if the reports are true and the sale goes through, we may see that rule is just as predictive as it has always been.