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2nd Writethru: China's Lenovo Group Acquires IBM's PC Business

Posted on: Thursday, 9 December 2004, 09:00 CST

2nd Writethru: China's Lenovo Group acquires IBM's PC business by Xinhua Writers Tian Sulei, Ni Siyi

BEIJING, Dec. 8 (Xinhua) -- Lenovo Group, China's personal computer giant, Wednesday signed a definitive agreement with IBM to acquire Big Blue's personal computer business for 1.25 billion US dollars, and another 500 million US dollars for liabilities and overhead.

"The purchase will make Lenovo Group the third largest PC maker worldwide with an annual revenue exceeding 10 billion US dollars," Lenovo Chairman Liu Chuanzhi said after signing the agreement with IBM vice-president John Joyce.

The move further highlighted Chinese companies' ambition to expand abroad, following brand names of Haier, TCL and Huawei.

"This acquisition will allow Chinese industry to make significant inroads on its path to globalization," Liu said. "It has changed the landscape of the global PC manufacturing business. "

Lenovo will acquire IBM's entire global desktop and laptop computer R&D and marketing business, the agreement says. In return, Lenovo will pay IBM 650 million US dollars in cash and 600 million US dollars in Lenovo stock, which will make IBM the owner of approximately 18.5 percent of Lenovo's equity stake.

Under the deal, Lenovo Holdings will keep around a 45 percent equity stake of Lenovo Group Limited, which is listed on the Stock Exchange of Hong Kong and has American Depositary Receipts traded in the United States.

Lenovo also agreed to take on liabilities that raise the total value of the deal for IBM to 1.75 billion US dollars.

After the transaction, the volume of Lenovo's PC business will reach 11.9 million units, based on its 2003 results, a fourfold increase in its current PC business. As a result, it will account for 8 percent of the world market share, IBM said in a press release.

Through the deal, Lenovo will "acquire global brand recognition, an international and diversified customer base and a world-class distribution network with global reach," said Yang Yuanqing, Lenovo vice-chairman, president and chief executive officer.

Yang will assume the post of chairman of Lenovo's PC business following completion of the transaction, expected in the second quarter of 2005. Stephen M. Ward, Jr., currently IBM senior vice president and general manager of IBM's Personal Systems Group, will serve as the chief executive officer of the new Lenovo.

Lenovo Group will locate its PC business worldwide headquarters in New York, with principal operations in Beijing and Raleigh, North Carolina, and sales offices throughout the world, according to company sources.

Lenovo will be the preferred supplier of PCs to IBM and will be allowed to use the IBM brand, including the "Think" brand, for five years under an agreement.

IT insiders said Lenovo's new PC business is expected to benefit from IBM's worldwide distribution and sales network covering 160 countries. For IBM, the transaction will further consolidate its presence in the world's fastest growing IT market through its significant stake in China's largest PC maker.

Lenovo commanded a 27 percent share of China's PC market in 2003 and Lenovo PCs ranked number one in the Asia Pacific ( excluding Japan) with a share of 12.6 percent in 2003. However, as the ninth largest PC maker worldwide, Lenovo's global market share was only 2 percent, while Dell had 16.8 percent and Hewlett- Packard had 15 percent of the market share in the third quarter of 2004. IBM was third with 5.6 percent of the global PC market in terms of shipment.

It is no secret that Lenovo, formerly known as Legend, has yearned to expand beyond China. With startup money of no more than 200,000 yuan (about 24,000 US dollars) in 1984, Lenovo spent a great deal of money early this year to become a top sponsor of the 2008 Beijing Olympic Games. Over the years, it has grown into the top spot in China. It also sells products ranging from cellular phones to supercomputers.

The decision to purchase the IBM PC business has been made following "meticulous consideration" over the development of the industry, said new Lenovo chairman Yang Yuanqing. "It's like putting a layer of earth, consolidating it, and then we putting another layer, to keep us from falling down."

IBM has its own reason for the retreat from the PC business. Although Big Blue helped make PCs a global phenomenon, IBM now makes little profit from PCs and often loses money, despite the fact that it's an 11 billion US dollar business for the company.

The deal will allow IBM to continue its shift from selling so- called commodity products toward selling services, software and high- end computers, it said.

"While we will have less revenue, we will have an improved financial profile," said Mark Loughridge, senior vice-president and chief financial officer of IBM.

Other analysts said that it could be wise for IBM to get out of building PCs because several years of slower sales of PC hardware will lie ahead between 2006 and 2008. But the emerging market in China is expect to see its biggest growth during that time, a boon for an IBM-Lenovo joint venture.

Observers also aired concerned for the future of the joint venture in terms of management, product renewal, services and even customer loyalty.

Competitors are already pouring cold water on the deal.

"We're not a big fan of the idea of taking companies and smashing them together," said Michael Dell, chairman of top PC producer Dell, during a question-and-answer session at Oracle Open World. "When was the last time you saw a successful acquisition or merger in the computer industry?"

Source: Xinhua News Agency - CEIS

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