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Dell To Buy IBM Drives, Chips

IBM and Dell Computer Corp. on Thursday struck a $16 billion, 7-year pact pact under which Dell will purchase storage, microelectronics, networking and display technology from IBM.

The pact also sets a "broad patent cross license agreement between the two companies and collaboration on the development of future product technology."

IBM (IBM) charged 9 1/2 to 176 1/4 and Dell (DELL) shares rose 2 13/16 to 83 11/16 on the news, which gave a boost to the broader technology sector, with strong gains posted in hardware stocks.

The deal "allows IBM to have valued-added technology," said Amir Ahari, analyst at IDC Corp, a key point as average selling prices of PC edge lower.

Computer makers are under intense pressure to shave costs and become more efficient amid a price-cutting war that has hurt even Dell, the fastest-growing manufacturer of PCs. It is No. 2 behind Compaq Computer Corp.

Texas-based Dell reported last month that its fourth-quarter sales fell short of Wall Street expectations and was hurt by rivals who bid more aggressively for corporate customers.

IBM, Based in Armonk, N.Y., is the world's largest computer company. It has been struggling for several years to lift sluggish sales of PCs and squeeze more profits from machines that have plummeted in price.

Moreover, access to IBM's technology labs allows Dell "to wean themselves from the Microsoft (MSFT) and Intel (INTC) camp" to offer their customers high-end technology.

Dell's Research & Development budget represents some 1.5 percent of its total revenue. "Millions vs. IBM's billions," he Ahari said.

The companies said they believed the deal to be the largest information technology OEM (original equipment manufacturer) pact ever struck. The deal is non-exclusive, they said.

The two PC giants have an existing OEM relationship, but an IBM executive told industry analysts at a press conference in New York that the deal is new business, albeit incremental.

IBM will see the bulk of the business by the seventh year. The company would not say how much of that business would be realized in the first year.

Doing a back-of-the-envelope calculation, this would mean an average of some $2 billion a year in business, or 33 percent of IBM's current $6.6 billion OEM business.

Dell will ramp up its purchases from IBM "five to tenfold" over the life of the agreement, Mike Lambert, senior vice president in the Enterprise Group, told CBS.MarketWatch.com.

IBM does not breakout its OEM business partners, but given the five to tenfold increase, it appears Dell accounts for some 5 percent of IBM's current OEM business.

"This is bringing together two good companies... Any collaboration is a win-win for both," said Joseph Hosler, an analyst at Independence Investment Associates in Boston. The question remains what type of price discounts does Dell get with the long-term purchasing agreement.

The pact isn't liely to change his perception of the two companies' strategies going forward, Hosler said, calling it an "enhancement of what they already have."

Dell said pairing IBM and Dell's technology with Dell's direct selling model will "enhance Dell's competitiveness in the global computer industry."

At first, the pact grants Dell access to IBM's high capacity disk drives, network adapter cards, flat panel displays and some custom chips, including high performance static random access memory (SRAM) chips.

In the future, the deal calls for Dell to buy IBM's copper, silicon-on-insulator and "other advanced technologies," the companies said in a joint statement.

"The body of Dell-developed product technology, particularly in servers, storage products and notebook PCs, is expanding rapidly," said Dell's Mike Lambert, senior vice president in the Enterprise Group.