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IBM sells PC division to Lenovo

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Sale,
Lenovo

John G. Spooner and Michael Kanellos CNET News.com

Published: 08 Dec 2004 08:35 GMT

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

The two companies plan to form a complex joint venture that would 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 acquisition is expected to be completed in the second quarter of 2005.

Under the deal, IBM will take an 18.9 percent stake in Lenovo. Lenovo will pay $1.25bn for the IBM PC unit and assume debt, which will bring the total cost to $1.75bn. Lenovo will pay roughly $650m in cash and $600m in securities. The joint venture is expected to ship around 12 million units based on 2003 numbers and have annual revenue from PC sales of $12bn.

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.

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 in its PC group and 9,200 employees at Lenovo.

Executives for both companies trumpeted the importance of the acquisition.

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

Key points of the deal:

Creates world's third-largest PC business
IBM to take 18.9 percent equity stake in Lenovo
Global business with worldwide reach and powerful brand name
Worldwide headquarters in New York
Transaction expected to be completed in second quarter 2005

"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.

Stephen Ward, IBM vice-president for Personal System Group, will become CEO, while Yang Yuanqing, Lenovo's current CEO, will become president.

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, senior vice-president and chief financial officer. It will also allow them to sell more services in China. If it goes through, the deal would allow IBM to continue its shift from selling so-called commodity products toward selling services, software and high-end computers. Although it helped make PCs a global phenomenon, IBM makes little profit from PCs and often loses money, despite the fact that it's an $11bn business for the company.

During the past several years, IBM has edged 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 eying making more 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 tech giants.

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

The big 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 go to consumers and very few systems get sold outside China, where it has strong ties to the government.

IBM sells to the cream of the corporate crop and often to customers who have invested heavily in IBM services and software. Its flagship ThinkPad notebooks come with novel design features like fingerprint readers for additional data security and hard drives that can survive a 6-foot drop.