China's Lenovo to buy IBM's PC business

Lenovo will pay $1.25B in cash and equity for the business

China's Lenovo Group Ltd. signed a definitive agreement today to acquire IBM's personal computing division. Lenovo will pay $1.25 billion in cash and equity for the business, which is expected to transform it into the world's No. 3 PC maker, the companies announced.

IBM will also take an 18.9% stake in Lenovo, they said. The cash, equity and assumption of debt combined brings the total value of the deal, expected to be completed in the second quarter of 2005, to about $1.75 billion.

A deal between the two companies comes as no surprise. It's been the talk of the PC industry since last week, when reports of IBM's plans to sell its PC business appeared in The New York Times (see story). However, few details were known about the nature of the deal and its possible effect on IBM's existing PC customers until today's announcement.

IBM and Lenovo said customers will see no change in product availability and support, either while the deal is being completed or afterward, while the PC operations of the two companies are integrated. Beyond the integration, the impact of the deal is less clear.

Following the deal, the two companies will enter an alliance under which IBM becomes the preferred services and customer financing provider to Lenovo, and Lenovo becomes the preferred supplier of PCs to IBM, they said. "Lenovo products will be co-branded for the next few years, to leverage the power of the IBM ThinkPad brand with our existing and future customers," Mark Loughridge, chief financial officer at IBM, said in a conference call.

"We will have a phased implementation with products initially using the IBM logo as the primary brand and transitioning over 60 months to an IBM endorsement of the Lenovo-branded products," he said.

Leasing, financing, warranty and maintenance services for Lenovo customers will be provided by IBM Global Financing and IBM Global Services, he said.

IBM is getting out of the PC manufacturing business because it sees greater profits in the services market, Loughridge said. "Our strategy is clear: to be the world leader in high-value solutions," he said, adding that the deal "helps IBM focus on enterprise and SMB [small and medium-size business] segments where we can best leverage our value-add."

Since 2002, IBM has spent about $9 billion to acquire more than 30 companies including PricewaterhouseCoopers Consulting. In the same period, it has divested itself of several businesses where it lacks scale or market opportunities, such as its hard disk drive and display units.

"The PC business is rapidly taking on the characteristic of the home and consumer industry, which favors enormous economies of scale focused on individual users and buyers. This agreement continues IBM's strategic rebalancing of our portfolio on the high-value enterprise market," Loughridge said.

The headquarters of Lenovo's new PC business will be in New York. Lenovo will also have major operations in Raleigh, N.C., and Beijing. Stephen Ward, currently senior vice president and general manager of IBM's personal systems group, will become CEO of Lenovo. Yuanqing Yang, currently vice chairman, president and CEO of Lenovo, will become chairman of Lenovo once the deal is completed.

Lenovo will have about 19,000 employees following the acquisition. Of those, about 10,000 are current IBM employees, of which about 4,000 are based in China.

The deal requires the approval of Lenovo shareholders and relevant regulatory authorities. Lenovo Holdings, Lenovo Group's largest shareholder, has already agreed to vote in favor of the transaction.

Copyright © 2004 IDG Communications, Inc.

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