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IBM Says Planned Sale of Computer Division Won't Affect Raleigh, N.C.-Area Jobs

Posted on: Wednesday, 8 December 2004, 15:00 CST

Dec. 8--IBM said late Tuesday that it will sell its personal computer division, transferring an iconic brand to a Chinese rival that also will absorb about 2,000 local workers.

Lenovo Group Ltd., which makes desktop and notebook PCs, agreed to pay $1.25 billion for the division, which is now based in Research Triangle Park. The transaction will give the combined entity broader reach, catapult Lenovo into the No. 3 spot among computer makers and help it compete with bigger rivals including Dell and Hewlett-Packard.

No layoffs are planned, and workers are expected to stay in their present locations. The deal will have minimal effect on employment, benefits or compensation, the companies said in a statement.

"There is very little overlap between what we do with IBM employees and Lenovo employees," Fran O'Sullivan, general manager for IBM's PC division in RTP, said in an interview. "It's a really good marriage."

Even so, it marks the end of an era in the PC world. IBM pioneered the computer business more than two decades ago, setting the standards that spawned an industry. That it has forged a relationship with a rival shows how difficult the business has become.

That it was with a Chinese company shows how globalization is transforming the economy.

Consumers are demanding ever-lower prices for the computers they buy. And with plenty of supply from many manufacturers, they get them. That makes it harder for any company to make money.

Countries such as China have an advantage because labor is cheaper. They are able to undercut the prices of many competitors.

The IBM-Lenovo deal "highlights the fact that the PC business is not very profitable," said Roger Kay, an analyst with IDC, a research company in Framingham, Mass. "IBM has certainly been struggling with it. You can assume all the vendors are struggling with this question one way or another."

Under terms of the transaction, expected to close by April, the new Lenovo will have access to IBM's brand name for five years. IBM will finance and service the computers, and its sales force will sell them to business customers.

Lenovo will pay IBM $1.25 billion in cash and stock, and it will assume $500 million in liabilities. IBM will maintain an 18.9 percent stake in the new Lenovo.

"It's not surprising this ends up as some sort of a joint venture," said Tim Bajarin, principal analyst with Creative Strategies, a technology consulting company. "I can't imagine IBM doing anything but that. They had to have major assurances that there is a strong level of service and support for the products that are sold."

The enterprise will be based in New York with significant operations in Beijing and the Triangle. Once the transaction is complete, Lenovo will have 19,000 workers, including about 10,000 from IBM. New York was chosen over RTP because it is a commercial center that will become more important as Lenovo builds its U.S. business, said John Lucy, a spokesman for IBM in RTP, where the company employs 13,300.

"Nobody tomorrow is going to lose a job or anything like that," said Lucy. "Over time we expect, because these are complementary organizations, the need for [work force] rebalancing to be minimal."

The transaction could prove a boon to the local commercial real estate market. IBM says it eventually plans to transfer the 2,000 affected local workers off its RTP campus. It wants to keep them in the vicinity but has no site in mind.

The slow decline of IBM's computer business has been no secret. In 2002, the company stopped making desktop computers, contracting its manufacturing operations to Sanmina-SCI. About 900 Triangle workers were transferred off IBM's payroll to Sanmina.

All IBM has done since is design and market desktop and notebook computers, with much of the work done in RTP. It wants to focus on more lucrative initiatives, such as managing the technology needs of other companies and developing software. Those operations now account for more than half of IBM's revenue.

"This agreement continues IBM's strategic rebalancing of our portfolio," IBM Chief Financial Officer Mark Loughridge said in a conference call with analysts and reporters. "We expect Lenovo to be a formidable competitor in the global PC market with economies of scale, global distribution channels, strong brand equity, an experienced management team."

Lenovo will ship more than 12 million computers a year and have revenue of about $12 billion, based on last year's figures. It will also be the biggest desktop and laptop manufacturer in Asia, according to figures from IDC.

"Lenovo is not looking at this as being a single-shot entry into the U.S. market," Bajarin said. "They see it as an opportunity to expand their markets worldwide."

But the company will face challenges.

Indeed, Dell and HP probably will try to win over IBM customers during the integration. That would lessen the value of the deal.

LENOVO GROUP

HEADQUARTERS: Beijing

TOP EXECUTIVE: Liu Chuanzhi, chairman

2003 SALES: $2.6 billion

WEB SITE: www.lenovogrp.com

BUSINESS: Lenovo, formerly known as Legend Group, is the largest computer manufacturer in China. It has been trying to expand outside its home market as it faces increasing competition from companies such as Dell, Hewlett-Packard and IBM. So far it has been able to undercut prices there because of favorable business conditions and ties to the Chinese government.

IBM

HEADQUARTERS: Armonk, N.Y.

TOP EXECUTIVE: Samuel J. Palmisano, chairman

2003 SALES: $89 billion

WEB SITE: www.ibm.com

BUSINESS: Historically, IBM is known as an equipment company. But increasingly it has been getting out of gear and into services. More than half its annual revenue comes from divisions that develop software and manage the technology needs of other businesses. It employs 13,300 in the Triangle -- its biggest site in the world -- across a range of business units.

Staff writer Jack Hagel contributed to this report.

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IBM, 6680, LNVGY, SANM, DELL, HPQ,

Source: The News & Observer

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