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IBM-Dell $16 Billion Megadeal Collapses

Dell Pulls the Plug on IBM

Much-ballyhooed Techno-Marriage Ends Up on Rocks, But IBM Chimes In with New $2 Billion Megadeal

PHOENIX, Feb 13 - Dell Computer Corp., the world's top PC maker, pulled the plug Tuesday on its $16 billion technology deal with IBM.  The company also said it was paring back ("rescoping" - in IBM lingo) significantly on its $6 billion services partnership with Big Blue.

The much-ballyhooed March 1999 agreement between the companies hasn't measured up to expectations because customers are choosing less expensive service providers, a Dell spokesman told Reuters on Feb 11.  

“What's changed is that customers are not choosing IBM as their service provider anymore because they are a little bit more expensive,” Dell spokesman Jon Weisblatt said.

Dell, which only has a small computer services division, signed a three-year agreement with Electronic Data Systems (EDS) in October 2002, under which EDS provides customer service efforts in the U.S. and Latin America.  

Dell also said on Tuesday that a $16 billion agreement it had signed with IBM in 1999 for computer parts had been phased out during the last few years as IBM sold those product lines, such as flat panel displays and hard disk drives.

IBM sold its hard disk drive business at the end of 2002 to Hitachi, which created a new company called Hitachi Global Storage in which IBM has a 30 percent stake. It will totally exit the business within three years.

No surprise there.  When IBM announced the sale of its storage business to Hitachi earlier last year, we questioned why Wall Street analysts weren't more inquisitive about the fate of that celebrated $16 billion IBM-Dell 1999 deal, that no one at Big Blue was talking about anymore.  

Here's an excerpt from the Annex Newsflash (June 4, 2002):

Whatever Happened to IBM-Dell "Megadeal?"

We know that Wall Street memories have always been short.  And that IBM has always talked up a storm and usually delivered a whimper.  But with the IBM-Hitachi deal about to be consummated, wonder why no one among the analysts is asking IBM the question about whatever happened to that much ballyhooed $16 billion "megadeal" between IBM and Dell, announced with a lot of fanfare in March 1999?  

The Story behind the Story...

So that's the latest news story.  And now, the story behind the story....

Surprised that such a huge deal has unraveled so soon?  You shouldn't be. Not if you're an Annex Research client.  To refresh our collective  memories, here's an excerpt from the Annex Bulletin 99-08 (Mar. 5, 1999) headlined...

"King, Prince of 'Fluff' Spin More 'Fluff' into Market":

Dell and IBM, the king and the prince of "fluff" (the market capitalization-over-equity ratio), have just spun more "fluff" into the market. Taken at its face value, the two companies announced yesterday a $16 billion, seven-year deal. And the gullible "investors," read gamblers at the Wall Street Casino, lapped it up as if the "fluff" were real gold. Which is why we invented the "fluff" ratio last year, ranking the computer companies we follow by their market cap-over-equity, not price-earnings, ratios.

Wall Street gamblers unaware of such caveats, sent both IBM and Dell shares soaring yesterday, helping push the Dow Jones Industrials by 192 points, or by 2% of its value. IBM was up by over 10 points at its high, boosting its market cap by over $10 billion, before dropping back later in the day. Dell was up by about six points at its daily high, for about an $8 billion swing on the IBM news. Dell shares also fell back later in the day.

One could hardly have imagined a better example of both, today's market volatility, and its perversion. Within a matter of hours, about $18 billion of new "wealth" was created out of thin air, riding on the companies' hot air news balloon. And then much of it evaporated, again within a matter of hours, as the hot air turned to cold reality. Meanwhile, it was mostly the traders (i.e., the "house"), not the long-term investors, who made out in the process.

A Scam a Day Keeps the Doctor away?

Of course, such cons would never be possible without the media playing its part in spinning the tale the "fluff" champions way. All headlines we checked out in this morning's papers heralded the IBM-Dell's $16 billion figure, implying that that's how much new business this deal would be worth to the two companies. And it might be - when Northern Siberia hosts the world's first championship of golf; when the month of February has two blue moons; when there is a snow storm in Singapore; or when Bill Clinton tells the truth about his sexual escapades.

For, if you examine the finer print of this "$16 billion" deal, you quickly begin to realize that the number is a wildly optimistic figure, especially in terms of its net plus to IBM, which the Wall Street analysts and the media have said would benefit more from the deal than Dell.

To read the rest of the above story, click here.  

In other words, what happened this week was predictable even the day $18 billion of market value surged and then vanished four years ago.  If anything, we are wondering what took them so long?

The New Visteon Megadeal

As if acting to blunt the bad news about the Dell deal, IBM announced on Wednesday that it had signed a $2 billion services deal with auto parts maker Visteon Corp., a spin-off of Ford Motor Co.

Under the 10-year deal, Big Blue will handle desktop support, data network management, customer support centers and application development. As part of the deal, IBM will take on an undisclosed number of Visteon employees.

Visteon was spun off from Ford Motor Co. in 2000. Visteon spokesman Greg Gardner told Reuters that transferring the technology work to IBM is part of its commitment to be completely separate from Ford by the end of this year.  In the fourth quarter, Ford accounted for 78 percent of Visteon's revenue.

IBM's services division has struck similar deals with companies in the past to take over their technology operations. At the end of 2002, for instance, it signed a $5 billion deal with JP Morgan Chase.

So you win some, you lose some... as the old adage goes.  IBM's techno-marriage with Dell ended up on the rocks, but its fourth quarter 2002 and first quarter 2003 new contract signings suggest Big Blue may have begun a real turnaround.

 Happy bargain hunting!

Bob Djurdjevic

For additional Annex Research reports, check out... 

2002: “Gerstner: The Untold Story”  (Dec 27), "Gerstner Spills the Beans" (Dec 13), "On a Wing and a Prayer" (Oct 21), "IBM-PwC Tie the Knot" (Oct 2), "Half or Double Trouble?" (Aug 12), Wall Street/Main Street Chasm (June 25), “Wall Street Casino,” (June 21), Big Blue Salami (June 19), "Looming IBM Layoffs" (May 14), "IBM 5-Yr Forecast: From Here to Eternity?" (Apr 2002),  “Tough Times, Soft Deals,” (Apr 25, 2002), “Gerstner’s Legacy: Good Manager, Poor Entrepreneur” (Jan 2002), IBM Pension Plan Vapors: Where Did $17 Billion Go? (Mar 2002), "Sir Lou OutLayed Lay!" (Apr 1, 2002).

A selection from prior years: Is IBM Cheating on Taxes, Annex Bulletin 99-17 (May 1999),  IBM 5-year Forecast 2001: An Unenviable Legacy (June 2001) "Break Up IBM!" (Mar. 1996), Fortune on IBM (June 15, 2000), “Smoke and Mirrors Galore,” July 2000), "Slam Dunk of Bunk" (Jan 2000), Annex Bulletin 98-14 ("Wag the Big Blue Dog"), Armonk's Fudge Factory (Apr. 9, 1999)Where Armonk Meets Wall Street, Greed Breeds Incest (November 1998)Stock Buybacks Questioned: Is IBM Mortgaging Its Future Again?, 97-18 (4/29/97),  "Some Insiders Cashed In On IBM Stock's Rise, Buybacks" 97-22, 7/27/97,  Djurdjevic’s Forbes column, "Is Big Blue Back?," 6/10/97;  “Executive Suite: How Sweet!,” (July 1997), "Gerstner: Best Years Are Behind", Aug. 10, 1999), "IBM's Best Years Are 3-4 Decades Behind Us" (July 1999), "Lou's Lair vs. Bill's Loft" (June 1999),  "Corporate Cabbage Patch Dolls," 98-39, 10/31/98; Djurdjevic’s Chronicles magazine October 1998 column, "Wall Street Boom; Main Street Doom", “Louis XIX of Armonk,” (Aug. 1996), "Mountain Shook, Mouse Was Born" (Mar. 25, 1994), “A Nice Guy Who Lost His Compass” (Jan 26, 1993), “Akers: The Last Emperor?” June 1991), Industry Stratification Trend (Mar. 30, 1990) etc.]

Or just click on and use "financial engineering" or similar  keywords.


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Volume XIX, Annex Newsflash No. 2003-02
February 13, 2003

Editor: Bob Djurdjevic
Published by Annex Research, Inc.

P.O. Box 97100, Phoenix, Arizona 85060-7100
TEL/FAX: (602) 824-8111

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