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IBM Retail Deal Keys on Profit Over Hardware

Stocks in this article: IBM HPQ RIMM DELL

NEW YORK ( TheStreet) -- International Business Machines (IBM) is adding retail kiosks and point of sale hardware seen at checkout lines across the globe to the list of ubiquitous tech products that it no longer wants to make or own.

On Tuesday, IBM divested control of its Retail Store Solutions unit to Japan's Toshiba TEC for $850 million, one more signal from IBM that data analysis -- including a retailer data and analytics initiative called Smarter Commerce -- trumps hardware manufacturing.

Like a similar divestiture of its PC business to Lenovo in 2004, IBM's deal shows that it would rather tilt its revenue to high margin consulting and data analysis operations, while allowing others to compete in manufacturing hardware that may increasingly become commoditized, otherwise dubbed by IBM as its "Smarter Planet" strategy.

IBM invested heavily in its Smarter Commerce initiative by way of a December 2011 acquisition of cloud services specialist DemandTec and 2010 purchases of Sterling Commerce and Coremetrics.

Big Blue's multi-decade turnaround has moved it from manufacturing tech hardware toward the IT services market, where its global services consulting unit contributes $60.2 billion to overall revenue of nearly $107 billion, as of 2011.

IBM will also be exiting a point of sale business where it competed against the likes of Toshiba , NCR (NCR), VeriFone Systems (PAY) and Micros Systems (MCRS). Previous divestitures like Lenovo had moved IBM from direct competition against Hewlett Packard (HPQ) and Dell (DELL) in some PC and hardware markets with declining sales and profit margins.

"In our view, IBM's POS point of sale business is not strategic to its positioning in our "Four-Legged Stool" analogy of enterprise infrastructure and the business is likely dilutive to IBM's pre-tax ~20% margins," wrote ISI analyst Brian Marshall in a note to clients. Marshall also says that the move is likely to lower IBM's net debt, while allowing the company to invest or acquire assets in its analytics, smarter planet and cloud computing initiatives.

IBM's track record of divestitures and acquisitions may be used as a model by other tech giants like Hewlett Packard and Research In Motion (RIMM) as they iron out strategies to negotiate declining profitability and market share in PC and smartphone businesses. Both companies have strong data security and virtualization assets that could be further emphasized in strategic M&A decisions.

Meanwhile, a flurry of security and cloud computing deals by Dell (DELL) has the world's third largest PC maker primed to move beyond the dying PC market.

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