IBM Sells PC Business to Lenovo

In a highly anticipated announcement, IBM confirmed late Tuesday it is selling its PC division to China’s Lenovo Group.

The company that popularized the personal computer in 1981 said it has been repositioning itself over the last few years to focus more on its enterprise business products, R&D and the creation of IBM’s intellectual capital division.

The transaction is worth an estimated $1.75 billion in cash and stock and debt. Lenovo’s shareholders and securities regulators in China and the United States must still approve the deal.

“The PC segment of the industry continues to take on characteristics of the home and consumer electronics industry, which favors enormous economies of scale and a focus on individual users and buyers,” IBM CEO Sam Palmisano said in a statement.

The sale comes a week after IT research firm Gartner predicted three of the Top 10 PC vendors wouldn’t be around to celebrate the holidays in 2007 because of reduced profits and growth.

Big Blue is still keeping its hand on the desktop, however, with an 18.9 percent equity stake in Lenovo. The deal also establishes a five-year brand licensing agreement that names Armonk, N.Y.-based IBM as the preferred services and customer financing provider to Lenovo. In turn, Lenovo said it would supply IBM all the desktop and laptop PCs it needs when selling computers to its small and medium business clients.

Lenovo’s new PC business includes IBM’s “Think” brand notebook franchise and allows Lenovo to take a majority stake in the PC manufacturing portion of the International Information Products Company (IIPC) in Shenzhen, China, which is co-owned by IBM and Lenovo’s rival Great Wall. The deal does not include IIPC’s IBM eServer xSeries manufacturing in China. IBM said it has had recent success in portables with growth exceeding 46 percent of client shipments.

Executives with both companies said the transaction creates the third-largest PC manufacturing company behind market leaders Dell and HP . According to IDC figures for 2003, the combined unit market share of Lenovo and IBM’s PC businesses worldwide is approximately 8 percent.

Steve Ward, Jr., currently IBM senior vice president and general manager of IBM’s Personal Systems Group has been named as Lenovo CEO after the transaction finalizes. Yuanqing Yang, currently vice chairman, president and chief executive officer of Lenovo, will serve as the chairman of Lenovo post-transaction.

“This is a winning transaction for customers of both companies,” Ward said in a statement. “Our two companies are a perfect fit sharing a common cultural commitment to innovation, customer service and shareholder value. Looking forward, Lenovo will pursue an aggressive yet prudent growth strategy and will boast an industry leading international management team comprising IBM’s and Lenovo’s existing senior executives and technology managers. I have great confidence in the future of this new business.”

IBM’s business in China initially dates back to 1934 when the company installed a business machine for the Peking Union Hospital. In 1979, after an absence of 30 years, IBM resumed its business in China. A medium range computer was installed at the Shenyang Blowers Works, the first IBM machine installed in the country since the founding of the People’s Republic of China. IBM’s business in China has expanded steadily since then.

Lenovo was founded in 1984, three years after IBM introduced the personal computer. Its fateful decision to license an operating system with Microsoft is legendary, a decision that led to the commoditization of the PC and Microsoft’s monopoly with its Windows operating system. Lenovo was the first company to introduce the home computer concept in the People’s Republic of China.

Lenovo said it will relocate its PC business from Beijing to New York with major hubs in Beijing and Raleigh, North Carolina, and sales offices throughout the world. The company said it will add about 10,000 current IBM employees — more than 40 percent of who already are in China and less than 25 percent of whom are in the United
States. After the transaction, Lenovo will have 19,000 employees on the payroll.

Lenovo could even get an edge on top PC vendor Dell, competing with its quick-ship model, according to Sageza Group analyst Jim Balderston. “Almost all Dell’s components are being made in Asia,” he pointed out, “so an Asian company coming in to pick up IBM’s PC business could have significant advantages in parts and assembly.” That would be especially true for sales in Asia, where Lenovo would also save on shipping costs.

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