Annex Newsflash 2005-06                     March 10, 2005


Updated 3/13/05, 1:15PM MST (adds "HP, CSC to Drive Renault")

U.S. Government Does Lay Off IBM/Lenovo

IBM PC Sale Okayed

Lenovo To Be Listed on New York Stock Exchange?

HP, CSC to Drive Renault into Future

PHOENIX, Mar 10 - The Committee on Foreign Investment in the U.S. (CFIUS), a secretive U.S. government agency whose acronym sounds close to its style of operation (insipid), has unanimously approved IBM's sale of its PC business to Lenovo, communist China's partially state-owned PC company, IBM announced yesterday.

"We are proceeding to open our doors at the end of the second quarter," said a jubilant Steve Ward, an IBM senior vice president who heads up the PC unit, in a teleconference with analysts that followed the announcement.  Ward will be the future CEO of "new" Lenovo (see "Good Riddance, Finally?," Dec 2004).

A committee that purports to protect our national interests but has only blocked one deal in its entire history (in 1990, President George H. Bush stopped the sale of a Seattle aircraft parts manufacturer to China) is run by Treasury Secretary John Snow.  The Committee members also come from the Defense, Justice, Commerce, State and Homeland Security departments (also see "Congress Should Lay Off IBM/Lenovo," Feb 2005).

There seems to be at least one redeeming value in the CFIUS committee's existence - for IBM and the Chinese.  

"We had an opportunity to meet with members of many agencies of the U.S. government, the senators...etc.," said IBM's Ward.  "We learned quite a bit, and developed relationships that many of our competitors don't have today.  It certainly would have taken years if it wasn't for the opportunity to go through these discussion.  So I am pretty optimistic overall."

So IBM used a lemon and made lemonade.  Martha Stewart would be proud.  

More surprising that the predictable review outcome was Ward's comment that IBM and Lenovo entered into this U.S. government investigation "voluntarily." 

"IBM is viewed as a great corporate citizen," he explained.  "And Lenovo has the same standing in their market. We thought the right thing to do was to voluntarily ask for this review."

Spoken like a true apparatchik. Volunteer subservience and obsequiousness before being told to grovel.  Less onerous on one's pride.  More beneficial to one's business.

And if you still have any doubt as to where Ward stands on government control and meddling in business, check out his following comment:

"Some people have thrown FUD (fear, uncertainty and doubt) about some of these government reviews... I think that was pretty disrespectful; I think you should always respect whatever kind of a review the government wants to do."

Which is why Ward will make a great CEO... of China's (partially) state-owned company headquartered in the U.S.

Tremendous Interest

Meanwhile, back to the PC business, Ward also said that his new company "will have new products out within weeks after opening our door."  He added that there is tremendous interest among the IBM partners in doing business with Lenovo.  

At last week's Partnerworld, for example, attended by some 5,000 IBM business partners, the IBM/Lenovo exhibit "was the single most-visited booth," Ward said.

In part, that's because in China, Lenovo grew 34% year-over-year, Ward said, quoting an industry market research source.  A virtual unknown until last December, when IBM announced its PC sale to it, Lenovo already has 26% market share in China.  And now, with the IBM brand name association and operations in 66 countries around the world just to start with, the company is poised for another growth spurt.

New York Stock Exchange Listing?

Ward is hoping to convert the current enthusiasm about Lenovo into a full listing on the New York Stock Exchange.  Lenovo is already a public company traded on the Hong Kong Stock Exchange, and thus follows the rules of the HKSE.  "They are different from the U.S., but are very stringent," said Ward.  

Ward added that Lenovo would also adhere to the U.S. accounting regulations.  "The reason for that is (that) we have an aspiration of being listed on the New York Stock Exchange as well."

He said Lenovo's current board of directors would be expanded into "a very international board."

IBM Forecast Update

Up until now, we have been assuming in our IBM revenue and profit forecasts that the IBM PC business sold to Lenovo would be a part of the Big Blue's results only in the first quarter of 2005.  Well, now that it is evident that the second quarter business would also be conducted under the IBM label, we have updated our 2005 numbers.

The upshot is that we expect IBM 2005 revenue to be $94.9 billion, down 1.5% from 2004, while the corresponding net profit is likely to rise 5% to $8.8 billion or $5.43 per share, for a 9.3% net margin.

In 2006, we are picking IBM to earn just shy of $10 billion, or $6.18 per share, on revenues of $96.3 billion, up 1.5% over 2005 (Annex clients can view the updated forecast charts in "Quality over Quantity," Mar 2005).

HP, CSC to Drive Renault into Future

PHOENIX, Mar 13 - The French automaker Renault has just hired two new drivers to take it to the future.  Over the next five years, Hewlett Packard Services (HPS) will handle its end user workplace, while CSC will manage Renault's IT infrastructure.  The contracts are valued at $150 million and $236 million respectively.  Typically, infrastructure services are less profitable from the IT services vendor's perspective.  So HP seems to have gotten the juicer part of the deal.

It is not unusual for major contracts to be divided among the competitors in Europe.  Britain's Inland Revenue, for example, did it in December 2004, when Capgemini and Fujitsu split a £3 billion ($5.2 billion) megadeal (see "Biggest Feather in Cap's Cap," Dec 2003).  And the British Ministry of Defense also did it earlier this month when it awarded EDS, Fujitsu and several other companies a $7.7 billion-megadeal (see "Rumor Lifts EDS', Fujitsu's Shares," Mar 2005).

What is unusual about the Renault deals, however, is that neither winner mentioned the other in its press release, thus making it seem as if each were the sole award-getter.  Oh well, maybe HPS and CSC will collaborate better in the data centers than they did in press rooms?  At least that's what Renault should be hoping.

CSC said it would manage Renault's network, midrange and  mainframe support to Renault sites in France and Spain.   The HPS portion of the deal includes management of Renault’s desktop environment including all PCs, workstations, local and network printers, video conferencing and other equipment.

HPS will also provide 24x7 helpdesk and eSupport (online web portal support), asset/license management, and mobility solutions enabling access to email and Intranet communications via personal digital assistants. Up to 160 Renault employees are expected to transfer to HP.

Additionally, HPS will develop an "Expertise Center" for Renault that will advise and support the company in all aspects of its computing solutions going forward. The center will focus on the delivery of desktop, hardware, server, mobility solutions and innovations capable of further improving operational efficiency and reducing costs within Renault, HP said in its release.

Renault acquired a global reach through its alliance with Nissan, and its acquisitions of  Romanian car manufacturer Dacia, and South Korea's Samsung Motors.  Worldwide, Renault employs 132,000 people. It sold 2,490,000 vehicles in 2004 for 40.7 billion euros ($55 billion) in revenues, and a 3.5 billion euros ($4.7 billion) in net income.

“This deal reinforces HP’s presence as a leading, global provider of services and desktop outsourcing,” said Pablo Sanchez-Lozano, vice president and general manager, Managed Services – EMEA, HP, in a release. “It also clearly demonstrates the power of HP’s Adaptive Enterprise strategy.”

In winning the Renault contract, HP beat out IBM Global Services and Atos Origin, a $7 billion-French IT services competitor with about 47,000 employees and a global reach.

Happy bargain hunting!

Bob Djurdjevic

For additional Annex Research reports, check out... 

2005 IT:  IBM PC Sale Okayed (Mar 2005); Octathlon 2005: Accenture Wins (Mar 2005);  IBM Global Services: Smaller, Shorter - Better? (Mar 2005);  IBM 5-yr Forecast: Quality over Quantity (Mar 2005);  Rumor Lifts EDS', Fujitsu's Shares (Mar 2005);  Capgemini: Turning the Corner (Feb 2005);  IBM Servers to Grow Again (Feb 2005);  Carly's Fickle Fans (Feb 2005);  CSC: Gearing Down on Purpose (Feb 2005);  EDS: Grossly Overpriced Stock (Feb 2005);  IBM Historical Update: 2004 Shot in the Arm (Feb 2005); New HeadTurners Series #1 (Feb 2005); IBM: A Crescendo Finale! (Jan 2005); Accenture: Strong Finish, Better Start (Jan 2005); Annex Coverage 2004: IT Services Dominate (Jan 2005)

2004 IT: EDS: The Titanium Stock (and other Wall Street tales) (Dec 2004); IBM PC: Good Riddance (Dec 2004); Fujitsu: Recovery Continues (Nov 2004);  IBM Server Renaissance (Nov 2004);  HP Hits Home Run (Nov 2004); Capgemini: Revenue, Stock Soars (Nov 2004); EDS: Jordan's Swan Song? (Nov 2004);  To Russia with Love and $ (Oct 2004); IBM: Slow Quarter No Longer (Oct 2004); Accenture: Revenues, Profits Up, Stock Down (Oct 2004); Capgemini: A Takeover Target? (Oct 2004); Sellout of America (Oct 2004); Spy Wars (Sep 2004); Outsourcing Boomerang (Sep 2004); EDS to Cut Up to 20,000 More Jobs (Sep 2004); Capgemini Stock Plummets on Unexpected Loss (Sep 2004); HP Savaged by Wall Street (Aug 2004); Moody's Lowers the Boon on EDS (July 2004); HP: Delivering Value Horizontally (June 2004); Accenture: Revving Up a Notch (June 2004); Beware Your CFO! (May 2004)IBM: Changing of the Guard (May 2004); Capgemini: Texas-size Home Run (May 2004); Following the Money (May 2004);  EDS: On a Wink and a Prayer (Apr 2004); HPS Wins by a Nose! (Octathlon 2004); Accenture: Burning the Track (Mar 2004);  IGS: "Crown Jewel" Restored? (Mar 2004); HP: Still No Cigar (Feb 2004); Cap Gemini: Another, Smaller Loss (Feb 2004); CSC: Good Quarter Gets Boos (Feb 2004); EDS: "Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); IT Industry: Whither Goeth It? (Jan 2004); Cronyism Is Alive and Well at EDS" (Jan 2004)

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

Volume XXI, Annex Newsflash 2005-06
March 10, 2005

Bob Djurdjevic, Editor
(c) Copyright 2005 by Annex Research, Inc. All rights reserved.

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