The deal will allow IBM to back out of manufacturing a product line on which it has made heavy losses, and concentrate on supplying services to businesses, the activity which has become its mainstay in recent years.

"IBM are doing a lot in the computer services field and they are not getting rid of all their hardware business," said Yoshihiro Shimada, an analyst with ING Baring Securities.

"This could be very good timing for them."

Turnaround

The Japanese firm has vowed to turn the unit back into a profitable business during the financial year which starts in April 2003.

But some analysts were sceptical and Hitachi's stock fell by almost 4% on fears that the Japanese firm had overpaid for its acquisition.

Hitachi will now combine the unit bought from IBM with its own hard disk drive business.

Analysts say a thorough restructuring is needed and that job cuts are likely to follow.

Slack demand

Hitachi executives declined to comment on possible job cuts, but did admit that a revamp was necessary.

Hard disk drives have suffered from the slack demand and falling prices that have hit other computer components.

But Hitachi says there are new growth opportunities for hard disk drives in advanced consumer electronics, from portable MP3 players to handheld computers.

Under the deal, Hitachi will hold 70% of the venture before taking full ownership after three years.