Dell Inc. (DELL), International Business Machines Corp. (IBM): What About Strategy?

Dell Inc. (NASDAQ:DELL)PC manufacturers and IT services providers are urged to find new businesses to diversify its revenue mix. PC shipments have fallen almost 14% in the first quarter of 2013 compared to the same quarter the previous year totaling 76.3 million units according to IDC. This result marked the worst quarter contraction since 1994 and it defined the trend as it was the fourth consecutive quarter in shipments decline.

Let’s see how Lenovo Group Limited (ADR) (OTCMKTS:LNVGY), Dell Inc. (NASDAQ:DELL) and International Business Machines Corp. (NYSE:IBM) are dealing with that difficult situation.

PC Shipments

Regarding the decline in PC shipments, Lenovo Group Limited (ADR) (OTCMKTS:LNVGY) is the company that is better positioned from the peer group to take advantage from this and gain market share. Lenovo has reached a record of 14.1 million shipments in the third quarter of 2013 and has gained market share in the last quarters reaching 16% in the third quarter of 2013 (HP had 17% of market share in the same quarter).

Dell Inc. (NASDAQ:DELL) will have to change its strategy if it does not want to be engulfed by other major players. After private equity firm Blackstone’s announcement that it would not bid for the computer maker citing an unprecedented eroding financial profile, Dell’s situation became even more complicated. It is losing market share in the PC market: it currently stands at 11% compared to Lenovo’s 16%. It had a pronounced deterioration in almost all segments: -13% in storage, -25% in mobility and -14% in desktop PCs all for the fourth quarter of 2013, year over year.

Although International Business Machines Corp. (NYSE:IBM) does not manufacture PCs anymore — it sold that business to Lenovo years ago — a decline in the PC market could affect the company’s revenue linked to this segment. International Business Machines Corp. (NYSE:IBM) is expected to divest its low-end server business. A probable buyer for that business is Lenovo Group Limited (ADR) (OTCMKTS:LNVGY), which has been focusing in the IT storage sector to diversify its income. If the PC sector keeps slumping, International Business Machines Corp. (NYSE:IBM) might not be able to command as high a sale price as it might like for its low-end server segment.

Revenue: The Hard Fact

Lenovo has posted record earnings of $205 million and record quarterly sales of $9.4 billion in the third quarter of 2013. Lenovo’s current revenue mix is diversified, with 51.7% coming from notebooks, 30% from desktops, 10.7% in the Multimedia, Internet and Digital Home (MIDH) business, and 7.5% in other revenue.

Dell Inc. (NASDAQ:DELL)’s revenue decreased 8% to $56.9 billion for 2013 from the previous year. Its net income for 2013 decreased 32% to $2.3 billio,n and its operating income declined the same percentage points to $3 billion compared to the previous year. These figures could generate panic in any investor. They certainly did for Blackstone.

Another reason Blackstone dropped the bid was Dell Inc. (NASDAQ:DELL)‘s steep decline in forecasted operating income, from $5.6 billion in July 2012 to $3 billion in March 2013 — a 45% drop in less than a year. This could be a problem for Michael Dell, founder and CEO, and for Silver Lake Partners, the firm which intends to help the company go private.

International Business Machines Corp. (NYSE:IBM)’s latest results came in short of analysts’ estimates. Its revenue decreased 5% to $23.4 billion for the first quarter of 2013 compared to the first quarter of 2012 and net income fell 1% to $3 billion from the same period comparison. Its shares plunged 10% from April 18 to April 22, the biggest decline in eight years. Investors should note this further sign of alarm.

What About Strategy?

Lenovo’s strategy seems to be focused in gaining market share through volume. To achieve this the company expanded its PC market share and grew revenue in the server and storage market (helped by its partnership with EMC, a leading provider of IT storage). Acquiring IBM’s server business could increase Lenovo’s position in that business segment. Other strategies include growing the MIDH business which includes tablets, smartphones and smart TV in China which currently contributes to 11% of the company’s revenue. Investors should also note that the company has achieved some of that growth through acquisitions: Medion in 2011, Stoneware and CCE in 2012 plus additional joint ventures.

Dell Inc. (NASDAQ:DELL) will have to solve a lot of problems regarding its current business model which seems to be ineffective in the actual market dynamics. But the most urgent issue is: what will happen to the company after Blackstone dropped the bid and the option of going private is not gaining momentum? The next months will be decisive. Another rough problem the company has to face is linked to Carl Icahn. The activist shareholder is evaluating the option of a preliminary bid to buy up to 58% of the company for $15 a share (now at $13.25). If he decides to drop the bid he will urge Dell Inc. (NASDAQ:DELL) to pay a heavy $9-a-share special dividend that would leave the company financially weaker.

International Business Machines Corp. (NYSE:IBM)’s management will have to find quick solutions to the actual problems the company is experiencing. Although the company is not in problems, the technology sector is volatile and actions must be taken promptly as trends are not encouraging.

The main concern IBM has is the surge in the cloud computing market. Currently, companies are averse to disbursing large quantities of money for building software and hardware systems. Instead they prefer to rent those systems as they are less expensive, take less time to implement and give flexibility for future changes.

In response, IBM’s management announced plans to center on reducing expenses (expect layoffs) and diverting businesses such as its server business, which could be acquired by Lenovo, to focus on growth areas such as cloud computing. This will take time and money, since IBM will have to invest in new technology; still, the company has the opportunity and experience to craft a change.

Final Comment

Lenovo, International Business Machines Corp. (NYSE:IBM) and Dell are dealing with tough conditions in each of their businesses. Lenovo’s strategy seems to be expanding its market share in the PC business and being aggressive in the new tablet, smartphones and smart TV market. It is also trying to diversify revenue by extending its reach to IT storage and cloud computing markets. It is well positioned to withstand this crisis.

Dell Inc. (NASDAQ:DELL) is really having problems with the weak PC market. Its revenue is not diversified as its peers and it is declining in almost all its business segments. Also, it is currently facing management problems as it could go private, it could be taken over by Icahn or it will have to pay a hefty dividend. Its financial situation is fragile and the next months will decide the fate of this PC giant.

IBM is also experiencing some of the actual problems in the PC and hardware market. Although in no problems for the moment, management will have to change the strategy and focus on areas of significant potential growth to deactivate its decline in revenue in the hardware and software businesses. Cloud computing could be a good option. The company finished the first quarter of 2013 with $12 billion in cash on hand that could use for acquisitions.

The article Prepare Your Portfolio for Changes in the PC Sector originally appeared on Fool.com and is written by Damian Illia.

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