Lenovo buys IBM PC for US$1.25b
(China Daily/Agencies)
Updated: 2004-12-09 09:56

Lenovo, China's largest personal computer maker and Olympic TOP sponsor, bought IBM's PC division yesterday to become the world's third largest PC giant.

One of the biggest Chinese overseas acquisitions ever at US$1.25 billion, the deal will be completed with US$650 million in cash and US$600 million in Lenovo stock, according to Lenovo sources.

Lenovo will also assume about US$500 million of net balance sheet liabilities from IBM, which means the total transaction will reach US$1.75 billion if the IBM debt is added in.

Under an agreement reached yesterday in Beijing after 13 months of negotiations, Lenovo will acquire IBM's entire global desktop and notebook computer business, including research and development and manufacturing. The firm will be entitled to use IBM's brand for five years as well as its global marketing and sales network.

The two computer market players have formed a strategic alliance in PC business worldwide, in which IBM will take 18.9 per cent of the new Lenovo's equity stake, as the second-largest share-holder, upon completion of the transaction in the second quarter of 2005, with Lenovo taking about 45 per cent.

"The historic moment marks a strategic breakthrough in our efforts to establish our PC business overseas," said Liu Chuanzhi, current chairman of Lenovo Group. "The blending of IBM's penetrable marketing and sales network with Lenovo's high efficiency in product design and manufacturing, as well as good understanding of China's huge potential market, promises a stunning success."

IBM will provide service and financing consulting support to Lenovo, while Lenovo will be the "preferred" supplier of PC products to IBM, enabling IBM to provide its small and medium business clients with a full range of personal computing solutions.

The new Lenovo group will base its PC business' worldwide headquarters in New York, with principal operations in Beijing and Raleigh in North Carolina of the United States, and sales offices throughout the world.

Stephen M Ward, Jr, currently IBM's senior vice-president and general manager of IBM's Personal Systems Group, will serve as CEO of Lenovo, post-transaction. Yang Yuanqing, current vice-chairman, president and CEO of Lenovo, will serve as chairman of the new Hong Kong-listed company.

The acquisition expands Lenovo's PC business fourfold, giving it an annual revenue of approximately US$12 billion and an annual output of 11.9 million units, based on 2003 results, the statement indicated.

In light of business continuity, the two companies will still keep their PC business operating separately for marketing and sales in the transaction adjustment period, which is expected to last 18 months, implied Yang.

Yang also hinted that the new Lenovo would launch a joint PC brand name, but details of the name were not given as the issue is still under negotiations between Lenovo and IBM.

Lenovo joined the International Olympic Committee's global sponsorship programme, The Olympic Programme (TOP), in March, the first for a Chinese enterprise at the time. Lenovo will provide computer equipment and services for the Turin Olympic Winter Games in 2006 and the Beijing Olympic Games in 2008.

"The historic partnership highlights the proven performance that Lenovo has achieved over the past 20 years since its establishment and has far-reaching significance for Chinese enterprises' internationalization strategies." said Ma Songde, vice-minister of Science and Technology.

The acquisition will sharpen Lenovo's competitive edge in the global market by taking full advantage of IBM's advanced technology and extensive global market presence, according to Zhang Bing, an analyst in the IT industry with the Beijing-based CITIC Securities Research Institute.

For IBM, industry experts analyzed, the sales will free the US tech giant to concentrate on computing services, which accords with IBM Chief Executive Sam Palmisano's strategy of "relying more on services for growth."

IBM senior vice-president and group executive of IBM Global Services, John R Joyce, commented: "The strategic partnership will be positive for enhancing IBM's portfolio of hardware, software, service and finance."

Pioneer IBM's exit from PC business seen as turning point

IBM's deal to sell its personal computer business to China's Lenovo, a move likely to reshape the industry, signals the PC has evolved into a mass consumer item with little profit, analysts say.

The exit by IBM, which pioneered the personal computer business and set many of the standards for the industry, is likely to benefit some rivals such as Dell.

But it also suggests that PCs are becoming a low-cost commodity with little profit and may mean a growing presence in the field for a Chinese firm like Lenovo, which up to now has been a small player.

PCs "are commodities in which supply chain management and the logistics of producing them as cheaply as possible becomes all the more important," said Jeffrey Yost at the Charles Babbage Institute

The new IBM brand taken over by Lenovo will be the number three worldwide manufacturer behind Dell and Hewlett-Packard.

IBM's personal systems division had sales of nearly 13 billion dollars over 12 months ended in September, with PCs representing about 10 billion of that. The division is only marginally profitable.

"The (PC) industry has changed tremendously. There's double digit growth right now, but by 2006 it will taper off to single digit growth. This is going to be a business that requires the ability to manage single-digit margins in order to survive," Gartner analyst Leslie Fiering said.

Gartner recently predicted that three of the top 10 PC manufacturers will exit the market by 2007 as a result of slower growth and tougher margins. It said PC unit growth is forecast to average 5.7 percent annually from 2006 through 2008, half the 11.3 percent average of 2003 through 2005.

PC revenue growth will be even less, due to falling prices. Revenues are expected to increase an average of two percent annually from 2006 through 2008, according to the research firm.

International Data Corp. meanwhile said it sees the PC market growing about 10 percent in unit volume in 2005, well below recent trends.

"We've expected the market to slow from peak recovery in 2004 since mid-2001," said Loren Loverde, director of IDC's Quarterly PC Tracker.

"The continuing market growth provides an excellent environment for Lenovo's acquisition of IBM's PC division," added Alan Promisel, a mobile computing analyst at IDC.

"Lenovo gains the global reach and scale to compete internationally while strengthening its position in relatively high growth commercial and portable markets."

IDC analysts said the changing economics of the PC industry make it less appealing for a company like IBM, which launched its first personal computers in 1981 and became the industry standard.

"IBM is the third largest PC vendor in the market, but increasingly its business model has moved away from the commodity economics of the PC market," IDC said in a research note.

"IBM's primary thrust in PCs has been part of a much larger engagement with customers, rather than PC-centric sales."

IDC said the deal also put China's Lenovo into a competitive position in a changing industry.

"The impact of this agreement is broad on a number of fronts, and will differ in China, Asia, the United States, and other regions," IDC said.

"Lenovo gains access to regions outside of China with a well-respected business partner and a highly established brand. In essence, this is the quickest (and maybe the only) way for Lenovo to grow in these markets given the lack of recognition of the Lenovo name outside of China."

Lenovo "will now clearly be competing directly with the leading PC vendors, particularly HP and Dell," IDC noted.

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