Lenovo buys IBM's PC unit for $1.25 billion
China's largest personal computer maker, Lenovo Group Ltd., said on Wednesday it is buying control of IBM's PC-making business for $1.25 billion, capping the U.S. tech giant's gradual withdrawal from the business it helped pioneer in 1981.
The deal, which forms the world's third-largest PC business, brings Lenovo onto the world stage and frees IBM to focus on higher-margin businesses such as computer services and software.
"On paper, this goes a way to achieving what Lenovo and IBM are hoping to achieve. Now it's up to execution," said Gartner analyst Martin Gilliland. "IBM is fairly safe because their goal was to get out of the PC business because they don't make any money out of it. Now Lenovo has to make it a success."
The deal, which took 13 months to negotiate, calls for Lenovo to pay IBM $650 million in cash and $600 million in stock. It will also assume $500 million in IBM debt.
IBM will hold an 18.9 percent stake in Lenovo, which will relocate its PC business from Beijing to New York and possibly list shares on Nasdaq or the New York Stock Exchange.
Stephen Ward, IBM senior vice president, will become Lenovo's chief executive officer.
"The price tag was a little bit lower than I would have expected," said Marty Shagrin, an analyst at Victory Capital Management in Cleveland, Ohio, which holds IBM shares in its $40 billion portfolio.
Lenovo will jump from eighth place among PC makers to number three, combining its 2.2 percent share with the 5.5 percent held by IBM, according to Gartner. The combined businesses had sales of $12 billion last year.
Dell Inc. leads the market with a 16.7 percent share, followed by Hewlett-Packard at 15 percent.
The sale of IBM's PC desktop and notebook computer lines allows the company to concentrate on more profitable operations including powerful server computers, storage and computer chips, analysts have said.
For Lenovo, which is battling intense competition in its home market, the deal with the world's largest computer company marks a breakthrough in its efforts to build its business overseas. It gives it a brand ranked the world's third-most valuable by BusinessWeek/Interbrand.
Lenovo will be under pressure to boost the profitability of the business it is buying, analysts have said.
"In terms of survival, this is a good deal. I think Lenovo's share price will remain stable when they resume trading," said Tat Au Yang, managing director of Apex Capital Management in Hong Kong.
"Our unwavering goal has been to create a truly international enterprise," said Liu Chuanzhi, chairman of Lenovo.
Lenovo will take ownership of IBM's "Think" trademark family, including its ThinkPad notebook brand and its ThinkCenter desktop line. It will also buy out IBM's interest in its joint venture with Lenovo rival Great Wall Technology, China's number two PC maker.
Lenovo will hire 10,000 IBM PC employees, including about 2,300 in the United States -- mostly product designers, marketers and sales specialists. The remaining 7,700 are mostly in China.
Lenovo and IBM said they will form a broad-based alliance under which IBM's Global Services unit will be the preferred supplier of technical services and customer financing to Lenovo's PC business.
Lenovo will be the preferred supplier of PCs to IBM, allowing IBM to continue offering its corporate customers a full range of computers. The PCs will be co-branded under a five-year brand licensing deal.
The Chinese firm will issue shares to IBM at HK$2.675 each, which was their closing price on Friday. Lenovo's stock, down 20 percent this year, has been suspended since Monday morning.
"Today's announcement further strengthens IBM's focus on the enterprise, while creating a new global business that is better positioned to capture the opportunities in the PC industry going forward," IBM Chairman and CEO Samuel Palmisano said in a statement.
Yang Yuanqing Yang, currently vice chairman, president and chief executive
officer of Lenovo, will be Lenovo's chairman after the deal closes, which is
expected to happen in the second quarter of 2005.