Chinese firm to buy IBM's PC business

China's largest personal computer maker, Lenovo Group, is buying IBM's PC-making business for $1.25 billion, marking the US giant's retreat from an industry it helped pioneer in 1981.

    Lenovo will jump to number three among PC makers

    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."


    Margin boost 


    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.

    Brand usage

    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.

    Broad-based alliance

    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.

    SOURCE: Reuters


    Interactive: How does your country vote at the UN?

    Interactive: How does your country vote at the UN?

    Explore how your country voted on global issues since 1946, as the world gears up for the 74th UN General Assembly.

    'We were forced out by the government soldiers'

    'We were forced out by the government soldiers'

    We dialled more than 35,000 random phone numbers to paint an accurate picture of displacement across South Sudan.

    Interactive: Plundering Cambodia's forests

    Interactive: Plundering Cambodia's forests

    Meet the man on a mission to take down Cambodia's timber tycoons and expose a rampant illegal cross-border trade.