The Inventor Has Pulled the Plug

The unthinkable has happened. It is something, which nobody would have imagined, even in his wildest dreams. The decision by IBM to sell its PC business lock, stock and barrel to the Chinese conglomerate Lenovo Group has stunned not only the computing fraternity but also the entire business community throughout the world.

The primary reason for being stunned is that IBM is the inventor of the ubiquitous PC, which adorns every office and something which has changed the entire landscape.

Perhaps the most interesting aspect of this announcement is that sentiments have completely ceased to play any role in today’s business environment. What matters is how to be profitable, something which IBM PC had not experienced for a long time now.

Now, let’s look at the most important points which come out of this selloff. IBM will receive at least $ 650 million in cash and up to $ 600 million in the Lenovo Group common stock, subject to a lock-up period expiring periodically over three years. IBM will be Lenovo’s second-largest shareholder, with an 18.9 percent stake. In addition, Lenovo will assume approximately $ 500 million of net balance sheet liabilities from IBM. Which means the total transaction amounts to $ 1.75 billion.

Secondly, this would result in Lenovo becoming the world’s third-largest PC vendor with approximately $ 12 billion annual revenue and volume of 11.9 million units, based on 2003 business results--a four-fold increase in Lenovo’s current PC business.

Thirdly, Lenovo will locate the worldwide headquarters of its PC business in New York. Upon completion of the transaction, it will have approximately 19,000 employees. Close to 10,000 current IBM employees will join Lenovo.

The second point is extremely significant. Although Lenovo is a leading IT enterprise in China, which is engaged in the manufacturing and sale of PCs, notebooks, mobile handsets, servers and peripherals, in one stroke it becomes the third largest PC vendor in the world--a milestone which it would not have been able to achieve anytime in the near future.

But what’s in it for the channel partners? Should they be happy or sad? In the short term, they are going to suffer; however, in the long term, it would bring in a lot of gains. Channels would have to suffer in the short term because there would be some sort of uncertainty in the market for sometime, which is certain to be exploited by IBM’s competitors. At the same time, the channel will gain in the long term due to the lowering of prices, which is bound to happen, as Chinese enterprises are well-known for their price competitiveness.

Asim Raina