IBM's Palmisano: Sale of PC Biz to Lenovo Helped With China Expansion

Outgoing IBM CEO Samuel Palmisano says IBM's divestiture of its PC business to Lenovo was good for Big Blue and strategic for its interests in China.

When IBM announced plans in 2004 to sell its PC division to Chinese systems maker Lenovo, the move was seen as controversial. However, Big Blue's outgoing CEO Samuel Palmisano called the move successful and strategic to the tech giant.

In an interview with The New York Times, Palmisano, discussed the $1.75 billion sale of IBM's PC unit to Lenovo in 2005-saying he thought IBM needed to get out of low-margin, commodity businesses like PCs and disk drives and get into higher-margin services opportunities.

The proposed sale of the PC division drew criticism internally before the sale and also scrutiny from the outside after the deal was announced. IBM insiders worried that losing the clout of the PC division would have negative effects, such as fewer sales of other IBM products without the PC as a driver, higher costs for parts without the purchasing power of the PC group and dilution of the IBM brand.

However, Palmisano responded to the criticisms with comparisons to Hewlett-Packard, which has debated getting rid of its PC operations. "I've heard every one of the arguments, every one of them," Palmisano told The Times. "But if you decide you're going to move to a different space, where there's innovation and, therefore, you can do unique things and get some premium for that, the PC business wasn't going to be it."

Moreover, furthering the HP comparison of IBM getting out of the PC business and HP getting deeper in with its 2002 acquisition of Compaq, Palmisano added: "You see the choice that was made, and how the economics worked out."

In 2005, Michael Useem, a professor a the University of Pennsylvania's Wharton School of Management, characterized IBM's sale of its PC business to Lenovo as a "brassy move" that would give IBM better access to the market for services in China.

Palmisano acknowledged as much to The Times, saying he passed on offers from Dell and others to buy the IBM PC business and settled on Lenovo for, as The Times article said, "strategic reasons: the Chinese government wants its corporations to expand globally, and by aiding that national goal, IBM enhanced its stature in the lucrative Chinese market, where the government still steers business."

Lenovo has gone on to become the second-largest PC maker in the world, behind HP and ahead of Dell, according to IDC.

Meanwhile, IBM continues to focus on growth markets as one of its strategic areas of interest with five-year plans and targets. Of these so-called growth markets, IBM tends to look at the BRIC countries-Brazil, Russia, India and China-as leading indicators. IBM reported that during the third quarter of 2011 its revenue from its growth markets increased 19 percent. Revenue in the BRIC countries increased 17 percent. Growth markets revenue represented 23 percent of IBM's total geographic revenue for the third quarter.

"Growth markets delivered outstanding revenue performance across software, hardware and services, and contributed to the company's expanded margins," Palmisano said in a statement when the company announced its Q3 earnings Oct. 17.

On Jan. 1, Virginia Rometty took over as IBM's CEO. Palmisano remains chairman of IBM.