Markets react enthusiastically to the $16 bn IBM-Dell pact

In the cut-throat technology market, the $16 billion (€14.8 billion) pact between the world's largest technology company, IBM, and the world's largest direct-sales computer manufacturer, Dell Computer Corporation, should be a win-win deal for both players.

Certainly, the markets responded enthusiastically to the announcement, with US shares climbing swiftly after lying in the doldrums for weeks, following cautious earnings statements from technology bellwethers which the market had taken as a harbinger of slowing PC sales.

In signing the agreement - which may well be the largest ever deal between two technology companies - Dell gets immediate access to the fruits of IBM's $5 billion research and development budget and the kinds of technologies which should prove particularly attractive to the business market Dell values most.

For IBM, the deal guarantees immediate penetration for its new technologies and products, allowing the technology giant to position its offerings where they can be seen and heard. This is an important consideration for IBM in fending off rivals such as Intel and Microsoft and, in the battle to control market share, gives IBM a better chance at having its technologies accepted as industry standards.

"By more extensively pairing IBM's world class technology with our own . . . we intend to enhance Dell's competitiveness in the global computer systems industry," said Dell enterprise systems group senior vice-president Mr Mike Lambert.

Under the terms of the agreement, Dell will purchase $16 billion worth of IBM products over seven years. Those initially will include storage, microelectronics, networking and display technology, but Dell will also have access to IBM's latest chip developments, including its cutting edge copper and silicon-on-insulator chips.

Dell has recently launched a high-profile, multiple-product online shopping Website, Gigabuys.com, which sells some IBM products and presumably could boost further the range of IBM items on offer.

Overall, the announcement should benefit the large Irish operations of both companies. Increased sales would be channelled through Dell's European headquarters in Limerick, where it manufactures computers for Europe, the Middle East, and Africa. And according to IBM Ireland, IBM's expanding Mulhuddart campus in Co Dublin manufactures the disk storage devices and microelectronics products included in the deal.

At present, Dell employs about 4,000 people in Limerick and Bray, which it expects to climb to 6,000. IBM has 3,000 Irish workers and is preparing to hire 1,400 more this year. By the end of 2000, IBM expects to have 5,000 Irish workers, mainly at its campus site.

"Obviously this is a big boost and good news for the campus," said IBM Ireland spokesman Mr Rory Caren.

The deal "gives us a pretty long-term arrangement with a key player", said Mr Brian McBride, Dell's vice-president for Britain and Ireland operations, noting that Dell now has special agreements with Microsoft, IBM and Intel to provide "the best chips, the best technologies, and the best programming".

Mr McBride said he expects the technologies from IBM to enhance Dell's products for the business market, which already constitutes some 70 per cent of Dell's sales. In a market with very narrow profit margins, the IBM deal will also help Dell trim costs. "When you're spending $16 billion, you know you're going to get pretty good prices," Mr McBride said.

For IBM, the arrangement guarantees a large-scale stream of revenue and a high level of product exposure. "Basically this is part of [IBM chairman and CEO] Lou Gerster's approach to getting IBM technologies out to the market, and getting them out to the market quickly," said Mr Caren.

While IBM consistently produces some of the most leading edge technologies in the industry, it has always been seen as a sluggish marketer and in particular has watched Microsoft successfully position rival products and then devour IBM's market share.

"IBM is good at the technology stuff but not so good at the sales and marketing stuff," acknowledged Dell's Mr McBride, who previously worked for IBM for 10 years. In October, IBM created a new organisation, the IBM Technology Group, to get new technologies out into the market without delay.

Yesterday, the Wall Street Journal quoted industry sources who speculated that Dell could also expand the deal in the future to have IBM supply services and support to Dell customers. IBM's services division generates annual revenues of $30 billion.

Such an arrangement could prove a boon to Ireland, since each company has a significant presence here. Nowhere else in the world do the two have major facilities in such close proximity, and centralising operations from Ireland for the European market would make sense logistically. However, Mr Caren said the agreement was clearly restricted to technologies, not services.