Lenovo To Buy IBM PC Business for $1.25 Billion

Ending nearly a week of speculation, IBM has reached an agreement to sell its personal computer business to Chinese PC maker Lenovo for US$1.25 billion in cash, a deal that calls for Big Blue to retain a sizeable stake in the business and for an IBM executive to take over the combined company.

The deal has massive ramifications for the computer industry, with Lenovo vaulting from the lower tier of top 10 computers makers into third place, where its access to low-cost manufacturing will make it a formidable competitor for market leader Dell and number two Hewlett-Packard. The combined PC company will have around $12 billion in worldwide revenue.

The total deal is worth closer to $1.75 billion, IBM said in a release, with Lenovo taking on about a half-billion-dollars worth of liabilities. IBM will take an 18.9 percent stake in Lenovo as well, making it that company’s number-two shareholder. IBM shares were up about a half-percent on the news in trading this morning.

Current IBM Vice President Stephen M. Ward, Jr., will serve as Lenovo’s CEO after the transaction, with current Lenovo CEO Yuanqing Yang moving into the chairman’s role. IBM will also provide customer service to business buyers of Lenovo PCs and will be the preferred provider of business financing.

Ongoing Alliance

IBM CEO Sam Palmisano said the deal represents an ongoing alliance as much as a one-time transaction, one that enables IBM to focus on enterprises while still gaining from changes in the PC marketplace.

“We have worked very carefully with Lenovo to put in place all the elements of a strong, successful, enduring global alliance,” he said in a statement. “IBM will continue to provide our clients with outstanding IBM- and Think-branded PCs through our alliance. And IBM will play an important role in the home and consumer markets by creating the advanced microprocessor and open software technology for the next-generation computing platform.”

Palmisano added that the deal “further strengthens IBM’s ability to capture the highest-value opportunities in a rapidly changing information technology industry.” IBM can now focus on “the business client and significant ongoing investments in R&D and the creation of intellectual capital.

In addition to ending a 20-year PC making odyssey for one of the industry’s pioneers, the deal represents two significant industry developments.

First, China’s Lenovo instantly gains worldwide reach through the acquisition and becomes a player in markets where it previously only dabbled. At the same time, the business decision for IBM might be just the first in a series of dominoes to fall and alter the PC landscape permanently, according to analysts.

Fork in Road

For Lenovo, the move quadruples its PC sales overnight and vaults it into rare company. Though IBM’s desktop business has lagged some, particularly among consumers, its ThinkPad notebooks remain strong sellers in the fastest-growing part of the PC industry.

Lenovo Chairman Chuanzhi Liu called the purchase a “breakthrough in Lenovo’s journey towards becoming an international company.”

“Since the beginning, our unwavering goal has been to create a truly international enterprise,” he said.

Analysts said the deal helps IBM by insulating it from the harsh realities of the PC business, notably the shrinking profit margins and pressure to reduce costs that has come about as PC makers find it increasingly difficult to differentiate their products, which are often based on the same components as their competitors’.

Yet the structure of the sale leaves it some exposure to its potential upside, notably the value-added services that it can still provide to enterprise that need help integrating the machines into network settings. Still, the move is not without risk, analysts said, since Lenovo essentially gains control of the valuable ThinkPad brand, for instance.

Buyers’ Market Ahead

The IBM deal might be just the first major shift in the PC marketplace as the industry experiences a projected dip in growth starting late next year.

Gartner analyst Leslie Fiering said the computer industry is about to head into another “buyer’s market,” as was the case during 2001. That tough period might force other vendors to exit the marketplace.

“Vendors that fail to differentiate themselves on the basis of price and life cycle service levels will be the most vulnerable,” Fiering said. “Vendors must optimize their cost structures and supply chains to remain profitable, and some PC vendors will find this task difficult.”

Gartner has predicted that three of the top 10 vendors could exit the industry within the next three years, and it recommends that enterprise customers consider varying their vendor choices in order to hedge against such fallout. It also recommends pushing for extended service and support contracts.

Jupiter Research analyst Joe Wilcox, meanwhile, said the sale underscores the massive changes in the industry in the past two decades, which began with IBM basically pioneering the industry and helping to give the world the dominant software business in the form of Microsoft.

“IBM practically invented the modern PC industry and the fact that they’re getting out is a sign of how much it has changed,” Wilcox said. “PCs are becoming a commodity business like home electronics and they’d rather not be on the front lines of the price war.”