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IBM’s hardware sales down, may sell server division Featured

IBM’s poor hardware sales results have led to speculation it will sell its low end server business, perhaps to Lenovo.

IBM has announced first quarter revenues of US$23.4 billion, down 5% from the first quarter of 2012. First-quarter net income was $3.0 billion, down 1%.

IBM shares tumbled on the news, which was worse than expected. Shares fell by nearly 9% to $190, the largest daily fall in eight years, when a similar quarterly result caused a similar drop. The lower share price has had an adverse effect on Warren Buffett’s Berkshire Hathaway, which is a major shareholder in IBM.

“Looking ahead we expect to benefit from investments we are making in our growth initiatives and from the actions we are taking to improve underperforming parts of the business,” said IBM chief Ginni Rometty.

Those underperforming parts include hardware. IBM sold its PC division in 2005 to Lenovo, which has subsequently become one of the world’s most successful suppliers. Now, according to reports, it is considering selling its commodity server division. News agency Bloomberg says that Lenovo is also the most likely buyer for that business. Lenovo has said to its shareholders that it is in discussions with an unnamed party about a major acquisition.

Financial analyst group Wells Fargo believes the acquisition would make sense to both parties. In a research note to its clients it said: “We believe an acquisition could give Lenovo greater scale in similar components to its PC business, which could provide greater margin or the ability to pass along the benefits to customers via lower pricing.

“This may cause further competitive pressures in the industry and have adverse impacts on Dell and HP. For IBM, it would be in keeping with its historical strategy of divesting commodity-like businesses.”

IBM is not commenting on the speculation, but is of course putting on as brave a face as possible. “The services business performed as expected with strong profit growth and significant new business in the quarter,” said Rommety.

“In the first quarter, we grew operating net income, earnings per share and expanded operating margins but we did not achieve all of our goals in the period. Despite a solid start and good client demand we did not close a number of software and mainframe transactions that have moved into the second quarter.”

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Graeme Philipson

Graeme Philipson is senior associate editor at iTWire and editor of sister publication CommsWire. He is also founder and Research Director of Connection Research, a market research and analysis firm specialising in the convergence of sustainable, digital and environmental technologies. He has been in the high tech industry for more than 30 years, most of that time as a market researcher, analyst and journalist. He was founding editor of MIS magazine, and is a former editor of Computerworld Australia. He was a research director for Gartner Asia Pacific and research manager for the Yankee Group Australia. He was a long time IT columnist in The Age and The Sydney Morning Herald, and is a recipient of the Kester Award for lifetime achievement in IT journalism.

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