Business Analysis: IBM sells PC unit to China for $2bn

Exit from personal computer market underlines Big Blue's attempt to reinvent itself

After 23 years of pain and struggle IBM has finally sold its personal computing division. The sale to Lenovo, China's biggest PC brand, for $1.75bn (£900m) brings to an end a two-decade period during which IBM nearly collapsed, found an unlikely lifeline and was brought back to life. It is now embarking on a future focused on software, technology solutions and high-value servers.

After 23 years of pain and struggle IBM has finally sold its personal computing division. The sale to Lenovo, China's biggest PC brand, for $1.75bn (£900m) brings to an end a two-decade period during which IBM nearly collapsed, found an unlikely lifeline and was brought back to life. It is now embarking on a future focused on software, technology solutions and high-value servers.

Veteran IBM watchers believe Tuesday night's announcement of the sale was probably six to seven years too late, having seen the likes of Dell storm to an apparently unassailable lead with its cheap products and slick distribution.

IBM's exit from PCs gives Lenovo the No 3 spot behind Dell and Hewlett-Packard. However, Sam Palmisano, the IBM chief executive, will hope it draws a line under the story of how the "Big Blue" got it so wrong in PCs and why, while struggling to make sense of that market, its other core business of mainframe computers was also brought close to implosion.

IBM's first foray into PCs was in 1981 but right from the off the company's approach was wrong, handing a key advantage to a tiny Seattle-based software business called Microsoft and to Intel, whose microprocessor was chosen to power the machine.

Even Louis Gerstner, the former American Express and RJR Nabisco hero who was hired to save IBM from a likely extinction in 1993, admits to getting PCs wrong. In a chapter of his 2002 book Who says elephants can't dance? which details his nine years in charge at IBM, he is frank about the problem.

"The single most important factor in our overall performance was that Intel and Microsoft controlled the key hardware and software architectures and were able to price accordingly," he wrote. "However, we weren't innocent bystanders as they had achieved those dominant positions. We had entered the business in the 1980s with a lack of enthusiasm for the product ... We had consistently underestimated the size and importance of the market of the PC market. We had never developed a sustained leadership position in distribution, vacillating between company-owned stores at one time, to dealers, to distributors to telephone sales systems. Finally we couldn't manufacture PCs in a world-class manner in respect to cost and speed to market."

His successor, Mr Palmisano, has finally cut IBM's losses although it will retain an 18.9 per cent stake in Lenovo, and IBM's brand, principally Think Pad, will continue in the PC market, albeit under Chinese control.

Mr Gerstner reckons IBM missed out on the chance to build the "most powerful computer franchise in the world", something Bill Gates jumped on with relish. However, while IBM was flailing around in PCs, bigger problems brewed with its core business of mainframe computers.

The cliché is that nobody ever got sacked for buying IBM, but you could certainly get very poor buying IBM shares. The situation when Mr Gerstner took over in 1993 was dire and every expert around was predicting worse to come.

Just as he was getting used to his new office at IBM's Armonk headquarters in New York State, Charles Morris and Charles Ferguson were writing in their book, Computer Wars: "There is a serious possibility that IBM is finished as a force in the industry. Bill Gates, the software tycoon whom everybody loves to hate, denies having said in an unguarded moment that IBM 'will fold in seven years'. But Gates may be right. IBM is now an also-ran in almost every major computer technology introduced since 1980. Traditional big computers are not going to disappear overnight, but they are old technology, and the realm in which they hold sway is steadily shrinking. The Brontosaurus moved deeper into the swamps when the mammals took over the forests, but one day it ran out of swamps."

During the entire 1970s IBM had also been labouring under an anti-trust lawsuit filed by the US Department of Justice which was dropped in 1982. Such constant scrutiny left the IBM culture in a soup of paranoia that stunted growth and innovation, just as the computer industry was about to embark on one of its periodic lurches forward.

The advent of the PC, which IBM handled so badly, meant Microsoft and Intel could lead the charge in breaking up its dominant position. This had been based on selling business customers all their computing needs in one go, from one integrated supplier. The simultaneous development of open operating platforms, such as Unix, meant this proprietary, closed approach to systems was being threatened with a rapid extinction.

John Akers, Mr Gerstner's predecessor, tried to change IBM's culture by running it as a loose confederation of "Baby Blues" to reflect the fact that traditional vertical integration in computing was at an end.

Microsoft and Intel were stealing IBM's core business with their new vision of "client" PCs connected to servers. IBM relied on its large mainframes for 90 per cent of profits but sales were collapsing. In just four months in 1993, mainframe sales fell a staggering 42 per cent as losses mounted to $800m in the same period.

The answer seemed obvious. It was time to break up IBM into its constituent parts, put an end to its global scale and succumb to fragmentation.

If there was a brilliant insight to Mr Gerstner's time at IBM, it was to see that the company's sheer size was its saving grace. As technology suppliers multiplied, Mr Gerstner and his team correctly predicted that companies would want experts to offer them solutions to integrate all this new kit that somehow connected together but came from a plethora of suppliers. IBM was in a position to offer these "end-to-end" technology solutions.

They also recognised that things were going to fragment further as the internet and digital networks developed which would require larger and more sophisticated servers to manage the ever increasing flow of digital data. All this played into the traditional strengths of IBM. The company was developed into a huge software business, having bought the likes of Lotus, with its famous Notes software, in 1995 in a hostile bid. The company now reckons it has the complete suit to keep all its business customers happy and is these days content to leave the likes of Microsoft to fight prolonged anti-trust investigations.

Yesterday it was left to Mr Palmisano to provide the sign-off to his predecessor's restructuring. "Over the past several years we have aggressively repositioned IBM to be the world's leading provider of innovation-enabled solutions for businesses and institutions of all sizes, in all industries," he said. "At the same time the PC segment of the industry continues to take on characteristics of the home and consumer electronics industry which favours enormous economies of scale and a focus on individual users and buyers. Today's announcement further strengthens IBM's focus on enterprise, while creating a new global business that is better positioned to capture the opportunities in the PC industry going forward."