IBM sells PC group to Lenovo

By John G. Spooner and Michael Kanellos
Staff Writer, CNET News.com

Published: December 8, 2004, 4:37 AM PST

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update IBM will sell its PC division to China-based Lenovo Group and take a minority stake in the former rival in a deal valued at $1.75 billion, the companies announced Tuesday.

The two companies plan to form a complex joint venture that will make Lenovo the third-largest PC maker in the world, behind Dell and Hewlett-Packard, but still give IBM a hand in the PC business. The deal is expected to be completed in the second quarter.

Lenovo will pay roughly $650 million in cash and $600 million in securities.

Based on both companies' 2003 sales figures, the joint venture will have an annual sales volume of 11.9 million units and revenue of $12 billion, increasing Lenovo's current PC business fourfold.

Lenovo will be the preferred supplier of PCs to IBM and will be allowed to use the IBM brand for five years under an agreement that includes the "Think" brand. Big Blue has promised to support the PC maker with marketing and via its IBM corporate sales force.

Lenovo is the ninth largest PC maker worldwide, according to the latest market share numbers compiled by Gartner.

The combined venture will have roughly 10,000 IBM employees and 9,200 Lenovo employees. It will be headquartered in New York, with operations in Beijing and in Raleigh, N.C.

Executives for both companies trumpeted the significance of the acquisition.

"As Lenovo's founder, I am excited by this breakthrough in Lenovo's journey towards becoming an international company," said Chuanzhi Liu, current chairman of Lenovo.

"Today's announcement further strengthens IBM's ability to capture the highest-value opportunities in a rapidly changing information technology industry," said Sam Palmisano, IBM chairman and chief executive officer.

Stephen Ward, vice president of IBM's Personal Systems Group, will become CEO, while Yang Yuanqing, Lenovo's current CEO, will become president.

In a press conference Wednesday, Yang said that Lenovo and IBM had been in talks for 13 months and that both parties believe the two businesses are complementary. Lenovo has a strong client base and sales infrastructure in the Chinese market, while IBM has a comprehensive network in PC sales on a global basis.

Yang also said that during the first phase of the integration process, Lenovo's and IBM's PC operations will carry on as usual, independent of each other. After 18 months, Lenovo and IBM will use a common brand. He added that IBM's R&D center in Japan will continue to be important to the company.

Separately, one senior IBM executive explained part of Big Blue's motivation for the transaction.

"While we will have less revenue, we will have an improved financial profile," said Mark Loughridge, IBM's chief financial officer. It will also allow the company to sell more services in China.

If it goes through, the deal will let IBM continue its shift from selling so-called commodity products to selling services, software and high-end computers. Although the company helped make PCs a global phenomenon, IBM makes little profit from PCs and often loses money.

During the past several years, IBM has been edging itself out of the commodity hardware business by selling its PC factories in North Carolina to Sanmina-SCI and its hard drive unit to Hitachi. IBM is also likely eyeing new inroads into the Chinese market by working with Lenovo to gain an edge in selling servers and services in China, a fast-growing market targeted by a number of U.S. tech giants.

Financial analysts say selling the PC business to a joint venture with Lenovo could add more than 5 cents per share to IBM's earnings in 2006, or $85 million in net income.

"We believe a joint-venture structure in PCs makes sense between the companies, as the buyer would collaborate with IBM design teams for a period of a few years and the buyer would assume control of manufacturing," Steven Fortuna, an analyst with Prudential Equity Group, wrote in a report Tuesday.

Meanwhile, it will give Lenovo the opportunity it has always craved to expand beyond China. In 2002, the company began to slightly expand into Spain and regional European markets but retreated due to market share losses at home.

A major problem, however, is that the deal combines two radically different companies. Lenovo performs very little independent R&D and mostly manufacturers low-end systems. More than half of its sales

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