Rumors Say IBM Will Merge Server, Technology Units

There are unconfirmed rumors running about that IBM is getting ready to merge its Enterprise Systems unit, which manufacturers and markets its servers and storage arrays, with its Technology Group, which develops processors and other electronics for IBM’s own consumption, as well as for third parties. Scott Brooks, a spokesperson for the Technology Group, said that IBM would neither confirm nor deny the reports. But the move might make some sense.

Having ditched its disk drive business and pared down its custom chip business to focus on being a foundry for high-profit, high-end chips, the Technology Group is still important to IBM, but not in a strategic way, as when it was trying to sell raw disks and chips to the entire IT industry.

As was just made clear at LinuxWorld, when IBM said it was going to push hard to promote its Power processors on Linux and Linux on Power, the 64-bit Power architecture is strategic. And as such, IBM needs to get its Technology Group and Enterprise Systems Group pulling the rope in the same direction. Sometimes each group has been working on cool technologies without the other being too aware. For instance, the fact that Apple is getting PowerPC 970 “G5” servers and workstations out the door well ahead of IBM in its own pSeries server and IntelliStation workstation lines is something of an embarrassment. Moreover, the fact that the Technology Group created the PowerPC 970 chip without the special instructions that allow it to run IBM’s own OS/400 operating system is particularly irksome to the installed base of 220,000 customers, who would love to have a cheap, dense OS/400-based blade server.

A consolidation of the units would also allow IBM to shed redundant jobs. The Enterprise Systems Group has about 13,000 employees worldwide and the Technology Group has about 17,000 employees. Whether IBM will merge the units and lay off people is unknown, but IBM is looking to cut costs wherever it can, and some job cuts seem reasonable. A merger of the units would also allow Big Blue to mask declining revenues and profits for individual product lines inside these two divisions and only talk about them generally, if it felt like it. This is one of the reasons why IBM merged its server and storage units, although there are other good reasons why it did so several years ago. Hewlett-Packard has also merged its server and storage units for similar reasons. Finally, by merging the units, IBM can simplify its accounting statements, since it has to reconcile Technology Group sales to Enterprise Systems Group in its quarterly statements. For the full 2003 year, Enterprise Systems Group posted sales of $14 billion in external sales with $837 million in internal sales; pre-tax income for the unit was $2.1 billion. Technology Group had $2.9 billion in external sales in 2003, and it had $805 million in sales to other IBM units, mostly the server unit; it had a pre-tax loss of $252 million.

The one sticking point in the merger of the two units might be IBM’s OEM chip customers, who want access to that new chip-making plant in East Fishkill, New York, which is cranking out Power4 and PowerPC 970 chips, as well as HP PA-8700 chips (at least for now). This is also where IBM will make its future Power5 and PowerPC 980 chips and the Power derivatives used in game consoles from Sony, Nintendo, and Microsoft. IBM will have a balancing act to perform, to be sure.

“Power is core and strategic,” said Gordon Haff, senior analyst at Illuminata in Nashua, New Hampshire. He could not confirm if the rumors about IBM were true, but he did share his thoughts. “IBM may want to reorganize and optimize for Power, and if it diminishes IBM a bit as a chip foundry, it’s no big deal.”

Separately, Enterprise Systems Group cut 300 jobs in its development teams this week, with the majority of the cuts coming from its disk systems development teams in San Jose, California. Apparently people also got pink slips in IBM’s facilities in Rochester, Minnesota; Austin, Texas; Endicott and Poughkeepsie, New York; Tuscon, Arizona; Raleigh, North Carolina; and Beaverton, Oregon.