Started 13 months ago, negotiations have concluded with a $1.25 billion deal that will lift China's leading PC maker to the No 3 spot in the world rankings, and boost its brand image at a time when it is trying to expand into US and European markets.

Paying $650 million in cash and the rest in stock options, Lenovo will also take on $500 million in balance-sheet debt.

The company will acquire IBM's Think product range, (including ThinkPad and ThinkCenter) as well as benefit from IBM's reputation, and global sales and distribution network.

IBM will have an 18% share of the new venture and the current head of IBM's PC division, Steve Ward, will become Lenovo's chief executive.

Greater access

According to a press release issued at the signing ceremony, Lenovo's PC business will expand fourfold. Annual PC revenues will subsequently total $12 billion.

One of the biggest PC makers will
now be a service-based company

IBM, by selling its PC division, has completed the transition from a manufacturer to a serviced-based company, and at the same time as Lenovo utilises IBM's global network, IBM gains greater access and exposure in China, currently the world's fastest growing computer market.

“I think this is definitely a good link up for Lenovo," said St John Moore, senior associate at APCO, a consulting firm. "It is a unique opportunity to expand their business, product line and technology in both China and abroad."

Questions remain though as to what exactly Lenovo has bought. Figures show that in the third quarter of this year IBM posted a loss in its PC business of $50 million on sales of $2.84 billion.

Cut-throat business

Computer services, on the other hand, made a profit of $1.2 billion off $11.1 billion in sales. To reverse this, Lenovo will need to utilise its low-cost manufacturing base, though some expressed doubts this can be done.

Speaking to Bloomberg, Francis Lun, general manager at Fulbright Securities in Hong Kong, said, "It's positive for IBM because they're hiving off a money-losing division. For Lenovo, earnings will be diluted.

The deal will help Lenovo access
markets difficult to break into

"The PC business is cut-throat and Lenovo already has problems meeting Dell at home. It's doubtful they can turn it around with low-cost manufacturing."

Lenovo's share price has fallen 20% this year, mainly due to the intensively competitive market.

But with fierce competition at home, the deal does help Lenovo access markets it was struggling to break into on its own.

A sponsor of the 2008 Beijing Olympics, the company is looking to be one of the first Chinese companies to build an international brand.

Japan overtaken

"I think the international perspective is one of the most interesting things about this deal and in
the future we will see a lot more of this"

St John Moore,
computer industry consultant

The deal also reflects the country's growing role in international outward investment, mergers and acquisitions.

This year, China is expected to become the world's fifth largest outward direct investor, overtaking Japan.

Last month there were reports that the Shanghai Automotive Industry Corporation was looking to set up a venture with MG Rover, a UK-based car company.

And last year, China's TCL bought the television arm of France's Thomson to create the world's largest TV manufacturer.

"I think the international perspective is one of the most interesting things about this deal and in the future we will see a lot more of this," said St John Moore.