In a partnership of two computer titans -- and rivals -- IBM Corp. said yesterday that it will sell technology valued at $16 billion to Dell Computer Corp.
Under the terms of the seven-year deal, one of the largest of its kind in industry history, Dell will buy disk drives, memory chips, flat-panel displays and other components from IBM.
The agreement also calls for IBM and Dell to share patents and collaborate on the development of new products.
"We mean this as much more than just a procurement agreement. This is an alliance," said James T. Vanderslice, senior vice president at IBM's technology group.
The deal was seen as a boost for the two companies, which have seen their profits squeezed by the acute pricing pressure that has arisen in the computer industry. The announcement sent IBM's stock up $4.25 to close at $171 a share. Dell shares rose 93.75 cents, finishing at $81.875.
"I think it's a great deal for both companies," said Carl Howe, an analyst with Forrester Research Inc. in Cambridge, Mass. "Think of it as Dell's business model harnessed to IBM's technology. That's a pretty potent business combination."
Dell's vaunted business model has relied on unusually direct, middleman-free marketing contacts between the company and its customers. However, Dell was seen as lacking a strong research and development operation. IBM, by con- trast, had what Howe called "great technology and terrible marketing."
This tidy match of strengths and weaknesses was enough to induce the two competitors to discuss cooperation. Mike Lambert, senior vice president of Dell's enterprise systems group, said talks between the two companies started in June.
Dell, based in Round Rock, Texas, had already been one of IBM's top customers for components, especially disk drives. Yesterday's accord takes the relationship between the two companies a large step further.
"We obviously are availing ourselves of some great technology that we will be able to integrate across our product line," Dell spokesman Peter Scacco said.
Daniel R. Kunstler, an analyst at J. P. Morgan Securities Inc. in San Francisco, said: "You could almost view this as an out-sourcing of a good chunk of [Dell's research and development] to IBM."
The agreement with IBM is not exclusive. Dell will continue to buy from other suppliers. IBM, too, can sell new products developed with Dell to other companies.
In the fluid world of high technology, where change is immediate and profit margins tight, such cozy relationships between adversaries have become common.
"You're seeing more and more competitors become partners [in the computer industry]," said George Logemann of the Yankee Group in Boston. "It's not like it's a shock. Fifteen years ago, it's a shock. Now I would call it opportunistic."
Armonk, N.Y.-based IBM has been quick to grab opportunities to sell parts, which then appear in other computer companies' machines. Such sales are often referred to as original equipment manufacturer or OEM agreements. IBM entered the OEM business in 1993, and as of last year, OEM sales accounted for $6.6 billion in revenue for Big Blue. Ten of IBM's top 20 customers are OEM customers.
IBM is developing components for a number of fast-growing markets, including processors for cell phones, hand-held devices and networking equipment, and storage disk drives for desktop and mobile computers.
And what about IBM's traditional stock in trade, the making of whole computers? Forrester Research's Howe said IBM "could use Dell to exit the [personal computer] manufacturing business." This may seem akin to Coca-Cola quitting the soda business, but Howe said such a step could make sense for IBM.
"Hardware manufacturing is not a high-margin business," he said.
Pub Date: 3/05/99