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March 4, 1999

DELL HITCHED TO IBM TECHNOLOGY IN $16BN DEAL

By CBR Staff Writer

By William Fellows

IBM Corp and Dell Computer Inc yesterday announced a long-term and far-reaching OEM and technology sharing and development agreement under which Dell will purchase $16bn of IBM equipment for use in its systems over the next seven years. With four vendors controlling almost 80% of the market for PCs, Dell is betting that by getting into bed with Big Blue, it can get better PC components more cheaply than its competitors in the low-margin PC business and secure the technologies that will allow it to expand its high-margin enterprise product lines. The deal puts every IBM technology group’s OEM products on the table. It has nothing to do with services or manufacturing.

Under the deal, Dell will incorporate IBM disk, SRAM memory and flat panel displays into systems beginning as soon as year-end. It will also take storage technology for the enterprise and IBM’s copper and silicon-on-insulator ASICs. It won’t be sourcing IBM’s iAPX-86-compatible parts but will continue to buy from Intel. It’s unlikely to become a PowerPC user. The deal won’t nix Dell’s other OEM relationships such as the one with Data General Corp for Fibre Channel storage. It will be incremental said Dell SVP enterprise systems Mike Lambert. In addition to patent cross- licensing, the two will collaborate on new technology development which could potentially increase the value of the overall deal significantly. Lambert pointed to Tivoli management software, storage area network technologies, ADSM and other connectivity solutions.

It is also expected to be the jumping off point for other relationships. The two will sit down next week and discuss Unix and how Dell will be able to utilize Monterey64 which merges IBM’s AIX and Santa Cruz Operation Inc UnixWare for use on Intel’s 64-bit chips. Lambert said talks about expanding its existing two-year old OEM arrangement with IBM started last June. The industry is running away faster than we can keep up and no one company can do it all, Lambert offered as the reason for the deal, our key objectives are global and product lines expansion.

The agreement is a ringing endorsement of IBM’s decision to create a technology division last October. It owns IBM Microelectronics, printing systems, storage, network hardware and all OEM technologies. OEM sales are one of IBM’s fastest growing businesses at 40% a year and were worth $6.6bn last year. Moreover, 10 of IBM’s top 20 customers are now OEM customers. However some observers question whether SVP Jim Vanderslice’s group might not be precariously close to putting IBM’s own PC server strategy out of kilter with the Dell deal and confuse the IBM salespeople. The two are now going to be competing head to head, using the same technologies. May the best solution win, said Dell, when we asked it about squaring up with NetFinity.

Observers also wonder whether Vanderslice, who didn’t exactly light a fire under IBM storage systems or printing systems before that, picked up just part of a deal that could have been much bigger had IBM been able to snare Dell for services too. Dell is already reckoned to have one of the best business models in the PC industry, which is expected to show 14% to 15% unit growth this year. Shares in both companies rose sharply in early morning trading before settling back. IBM closed up $4.25 at $171, while Dell closed up just shy of a dollar at $82.93.

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