Lenovo buys IBM PC business for $1.25 billion

In one of the biggest Chinese overseas acquisitions ever, China's largest personal computer maker, Lenovo Group has signed a definitive agreement to acquire IBM's personal computing division for $1.25 billion in cash and stock.

The complex acquisition, which would be completed in the second quarter of 2005, would make Lenovo the third-largest PC maker in the world, behind Dell and Hewlett-Packard. 

The company, which is presently China's biggest computer maker with 27% market share, is also the biggest in Asia. While Lenovo will pay $1.25 billion for the IBM PC unit and assume $500 million in net balance sheet liabilities from the IBM debt, IBM will take an 18.9% stake in Lenovo and is expected to recognize a gain on the sale following completion of the
transaction. The Chinese major will pay roughly $650 million in cash and $600 million in securities.

Besides, Lenovo will also be the preferred supplier of PCs to IBM and will be allowed to use the IBM brand, including its 'Think' brand for five years. The arrangement will also enable IBM to offer a full range of personal computing solutions to its enterprise and small and medium business clients.

The JV is expected to ship around 12 million units based on 2003 numbers and have annual revenues of $12 billion from PC sales. According to IDC figures for 2003, the combined unit market share of Lenovo and IBM's PC businesses worldwide is approximately 8%. The transaction will dramatically strengthen Lenovo's global presence in the fast-growing notebook PC marketplace. 

As part of the strategic business alliance, IBM will provide marketing support and demand generation services for Lenovo products through its existing 30,000 enterprise sales force, and through IBM.com as well. Also, Lenovo products will also be sold through IBM PC specialists that will join the company. 

The agreement also paves way for Lenovo to have IBM Global Financing and IBM Global Services, as its preferred partners for leasing and financing services, and for warranty and maintenance services, respectively. 

While the deal enables IBM to get out of the PC desktop and notebook business and focus more on its high-margin computer services, software, server and storage business, it would help Lenovo tackle intense competition on its turf. 

It also takes the Chinese major in the select club of Chinese manufacturers who have now started going global by acquiring major brands. On completion of the deal, Lenovo will also inherit 10,000 IBM employees, 40% of whom are already in China, while less than 25% are in the US-taking its overall employee strength to 19,000. 

Announcing the deal in Beijing, Lenovo Chairman, Liu Chuanzhi said that the company was taking over IBM's desktop PC business, including R&D and manufacturing. In a statement issued by IBM's Chairman and CEO, Samuel Palmisano, the deal with Lenovo strengthens IBM's ability to capture the 'highest-value opportunities' in a rapidly changing industry. “Over the past several years, we have aggressively repositioned IBM to provide innovation-enabled solutions for businesses and institutions of all sizes, in all industries,” he said. 

According to him, the agreement with Lenovo will further strengthen IBM's focus on the enterprise, while creating a new global business that is better positioned to capture the opportunities in the PC industry. “In Lenovo, we have a partner with powerful competitive capabilities in China and Asia and in consumer and desktop PCs. We have worked very carefully with Lenovo to put in place all the elements of a strong, successful, enduring global alliance,” Samuel added. The company expects to shift its worldwide PC business headquarters to New York, with principal operations in Beijing and Raleigh, North Carolina, and sales offices throughout the world. 

While IBM's Senior VP and GM of its Personal Systems Group, Stephen M Ward, Jr will serve as the CEO of Lenovo following completion of the transaction, Lenovo's Vice Chairman, President and CEO Yuanqing Yang will serve as the Chairman of post-transaction company. 

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NEW DELHI