IBM Sells PC Biz to Lenovo for $1.75B

By Suzanne Deffree -- Electronic News, 12/8/2004

IBM's awaited personal computing division sale to Lenovo Group Ltd. became official this morning with an announcement that Big Blue will pass the unit to China's number one PC maker for $1.75 billion.

The deal gives Lenovo rights to use IBM's "Think" brand and makes it the world's third largest PC company with $12 billion in revenue and volume of about 12 million units, falling behind Dell and HP.

The sale was not unexpected. News had leaked out late last week, with IBM then refusing to comment. IBM's growth away from the PC world – one it helped create – has also been evidenced by its recent transactions, ones that distanced the company further from the consumer home market, including $9 billion in acquisitions of enterprise-related companies like PricewaterhouseCoopers Consulting.

"This agreement is consistent with IBM’s strategy to focus on those segments of the enterprise and SMB [small and medium business] markets where we can best leverage our value add, by owning those assets and capabilities where we can create significant value, and partnering for other capabilities to provide our clients with end-to-end solutions," Mark Loughridge, IBM’s senior VP and CFO, said on a conference call.

"The IT sector is one of the most dynamic in the market. To bring long-term value for clients, companies need to continually reinvent themselves," he continued. In recent years we have talked about bifurcation in the industry, where two winning models have emerged, the high-value, high-innovation, solutions-led model, and the low-cost model that requires economies of scale and requires differentiation through other means. IBM’s strategy is clear, to be the world leader in providing high value solutions, focused on the enterprise and our small and medium business clients, in all industries and countries worldwide."

IBM Still in the Game

But the cut won't be a clean one for IBM. The complex transaction, expected to close in Q2 2005, also calls for IBM to take an 18.9 percent equity stake in the foreign company, making it Lenovo's second largest shareholder.

Further, IBM will become the preferred services and customer financing provider to Lenovo, while Lenovo will become the preferred supplier of PCs to IBM. Lenovo products will also be sold through IBM PC specialists that will join Lenovo, allowing IBM to keep supplying Think PCs. IBM Global Financing and IBM Global Services will be preferred providers to Lenovo for leasing and financing services, and for warranty and maintenance services, respectively, IBM said.

Big Blue will also see one of its executives -- Stephen M. Ward, Jr., currently IBM senior VP and general manager of IBM's personal systems group -- become CEO of Lenovo following completion of the transaction. Yuanqing Yang, currently vice chairman, president and CEO of Lenovo, will serve as the chairman of Lenovo post-transaction. Approximately 10,000 current IBM employees will also join Lenovo post-transaction.

Lenovo will locate its PC business worldwide headquarters in New York, like IBM, with principal operations in Beijing and Raleigh, N.C., and sales offices throughout the world.

"In Lenovo we have a partner with powerful competitive capabilities in China and Asia and in consumer and desktop PCs," Samuel J. Palmisano, IBM chairman and CEO, said in a statement. "We have worked very carefully with Lenovo to put in place all the elements of a strong, successful, enduring global alliance. IBM will continue to provide our clients with outstanding IBM- and Think-branded PCs through our alliance. And IBM will play an important role in the home and consumer markets by creating the advanced microprocessor and open software technology for the next-generation computing platform -- opportunities that play to IBM's unique innovation capabilities."

Landmark Deal

A company keeping its fingers in a branded technology after the sale to a China company may become commonplace. Richard Douherty, Envisioneering Group research director, says this type of deal may be the next big thing for cooperation with China-based companies.

"We see this deal as another landmark in electronics," he said. Douherty noted a similar deal between RCA Thompson and China's TCL last year, where TCL bought RCA and its well-known brand from the company. Following that, Thompson and TCL in July merged into one company.

"We see sort of book ends for a new model of high-tech companies and PC companies doing business with China."

In any event, the PC industry will see a 10 percent up-tick next year. That's according to IDC, which believes the growth will be driven by strong sales in the commercial segment.
"The continuing market growth provides an excellent environment for Lenovo's acquisition of IBM's PC division," Alan Promisel, mobile computing analyst at IDC, said. "Lenovo gains the global reach and scale to compete internationally while strengthening its position in relatively high growth commercial and portable markets."