Wall Street applauds $16bn deal between Dell and IBM

DRAWING APPLAUSE from Wall Street, International Business Machines (IBM) revealed yesterday that it had reached an agreement with Dell Computer to supply it with equipment and components. The deal should be worth $16bn (pounds 10bn) over seven years, making it the largest-ever struck in the information technology sector.

The agreement means initially that Dell will buy parts from IBM such as disk drives, memory chips and flat displays. Both companies stressed that in the longer term Texas-based Dell would have access to IBM's huge research division, with an annual budget of around $5bn.

IBM is guaranteed a steady and voracious new customer and a significant revenue boost. Dell has emerged in recent years as the fastest-growing maker of PCs in the world and the second-largest after Compaq. IBM shares rocketed in morning trading in New York yesterday, rising $91/4 to $176 by midday. Shares in Dell had gained $3 to $8315/16.

"They both benefit. Dell gets research and development expertise and IBM gets Dell as a huge customer," said Dan Ries, an analyst at Kaufman Brothers. "Dell is light in research and IBM is technology heavy."

Dell, America's biggest direct seller of PCs, has enjoyed three years of meteoric growth and share performance. Last month, however, the company reported that fourth-quarter earnings came in short of Wall Street expectations. Its quarterly sales rose by 38 per cent, below the 50 per cent achieved in the past two years. Dell has suffered as competitors, including Compaq, have joined in direct selling. Its corporate business division, selling network servers and memory banks, has also been wounded by rivals. The company will still be free to buy parts from suppliers other than IBM.

Based outside New York, IBM has struggled for years to boost flagging PC sales and preserve profits as hardware prices have fallen. Chief executive Louis Gerstner has told analysts the company would single out components, computer services and software as areas that could help boost revenues.

Some analysts had expected Dell to enter into a computer services agreement with IBM.