HP Drama Underscores Lenovo-IBM Challenges
The dramatic dismissal of Carla Fiorino underscores
the challenges Lenovo (formerly Legend) and IBM face
in turning the proposed joint venture into a profitable
enterprise. Fiorino was dismissed because of her failure
to turn the HP/Compaq merger into a new highly profitable
business for HP.
In the recent debate
over the Lenovo/IBM deal, a simple business fact
has been overlooked: neither Lenovo nor IBM's PC division
are profitable. Lenovo has been losing market share
to Dell in
its home market in China, and went so far as to take pay
cuts at the management level. Before the IBM deal
was announced, Lenovo's management had been looking
at various strategies, including going into investment
banking, so that it could diversify from the cutthroat
PC business.
The proposed deal is oddly reminiscent of Fiorino's
proposed HP merger with Compaq in 2001. The deal, which
was met with stiff opposition, and only passed by a narrow
vote, was sold as bringing wider breadth to HP's product
line so that it could compete with Dell on the PC side
and IBM and Sun on the server side.
While the merger has succeeded in expanding HP's product
line, it has not brought higher profits to the company.
HP continues to derive more than 95% of its profits from
the sale of printers and ink cartridges. Fiorino's successor
will most likely consider breaking up the company so
that at least the profitable printer business can be
salvaged.
In contrast, the proposed Lenovo/IBM deal is much more
complicated. Unlike HP, Lenovo does not have a profitable
core business it can fall back on, and continues to get
mauled by Dell in its Chinese home market. IBM wants
to get out of the PC business so that it can focus on
its much more profitable services business.
Then, there are two more factors which make the HP/Compaq
merger simple in comparison; the difficulty of merging
two completely different cultures, not just business
cultures, and increasing political meddling from the
US congress on "security" grounds.
The longer this deal takes to go through, the worse
the odds get against it.
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