The deal, which forms the world's third-largest PC business, is the latest example of a Chinese company buying a Western brand and manufacturing operations to make its mark on the world stage.
At the same time, it 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," he added.
The deal, which took 13 months to negotiate, calls for Lenovo to pay IBM $650 million in cash and $600 million in stock.
Assumption of debt
It will also assume $500 million in IBM debt.
Lenovo's Liu Chuanzhi (L) and
John Joyce concluded the deal
IBM will hold an 18.9% 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 while Yuanqing Yang, currently vice-chairman, president and chief executive officer of Lenovo, will be Lenovo's chairman.
"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.
"But obsessing about the price misses the point that IBM for a long time has wanted to become more of a services and software company."
The deal, which is expected to close in the second quarter of next year, will result in a pre-tax gain of $900 million to $1.2 billion, said Mark Loughridge, IBM's chief financial officer.
It will enable IBM to improve gross profit margins by three percentage points, he added.
Lenovo will jump from eighth place among PC makers to number three, combining its 2.2% share with the 5.5% held by IBM, according to Gartner. The combined businesses had sales of $12 billion last year.
Dell leads the market with a 16.7% share, followed by Hewlett-Packard at 15%.
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 say.
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.
Lenovo will get to use the IBM
name for five years
It gives it a brand ranked the world's third-most valuable by BusinessWeek/Interbrand.
The former IBM PC products will use the IBM logo for up to five years before switching to a Lenovo brand.
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 PC-making joint venture with Lenovo rival Great Wall Technology, China's number two PC maker.
Lenovo will hire 10,000 IBM PC employees, including about 2300 in the US - mostly product designers, marketers and sales specialists.
The remaining 7700 are mostly in the Great Wall venture in China.
Lenovo and IBM said they would form a broad-based alliance under which IBM's global services unit would 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 Chinese firm will issue shares to IBM at HK$2.675 each, which was their closing price on Friday. Lenovo's stock, down 20% this year, has been suspended since Monday morning.