Posted on: Wednesday, December 8, 2004

China tech firm buys IBM unit

By Bruce Meyerson
Associated Press

NEW YORK — China's biggest computer maker, Lenovo Group, said yesterday that it has acquired a majority stake in International Business Machines Corp.'s personal computer business for $1.75 billion in cash and stock, in one of the biggest Chinese overseas acquisitions ever.

The acquisition would make Lenovo the third-largest PC company in the world, said Lenovo's chairman, Liu Chuanzhihe. IBM currently holds that spot.

The deal ends IBM's long transition from PC pioneer to peripheral player. Under the terms, IBM will keep an 18.9 percent stake in the company.

The combined PC revenue for the two companies in 2003 was $12 billion. The new company will have an estimated 8 percent share of the worldwide PC market.

Lenova will take over the research and development and manufacturing of the PCs, Liu told reporters in Beijing.

Like other major Chinese manufacturers hoping to expand overseas, Lenovo is planning to leverage a well-known foreign brand name. Liu said the company would be entitled to freely use IBM's brand name in five years' time.

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 Lenovo after the completion of the transaction. Yuanqing Yang, currently vice chairman, president and chief executive officer of Lenovo, will serve as the chairman of Lenovo post-transaction.

Lenovo is China's biggest computer maker, claiming a 27 percent market share, and is also the biggest in Asia. Its shares are traded in Hong Kong.

The announcement yesterday followed reports a deal was imminent. Yesterday, Lenovo's Hong Kong unit confirmed it was in talks with a "major international company in the information technology business" but hadn't named the company, saying the negotiations were confidential.

With speculation about the impending deal mounting yesterday, IBM's stock fell $1.57 per share to $96.10 in trading on the New York Stock Exchange.

"The bigger the baby, the more difficult the delivery," Liu quipped when asked about the delay in making a formal announcement.

The companies expect that by combining operations, they'll be able to save money on manufacturing and expand their razor-thin profit margins despite intense pricing pressures. Lenovo also hopes the IBM brand and the company's vast corporate client base will bolster its sagging fortunes.

IBM designs its ThinkPad laptops and ThinkCentre desktops, but no longer manufactures them at any plants it owns alone. Instead, all its PCs are either produced through joint ventures or outsourced to other manufacturers.

Globally, IBM sold 6.8 million PCs in the first nine months of 2004 for a 5 percent market share, research firm Gartner Inc. said. That compares with 16.4 percent for Dell Inc. and 13.9 percent for Hewlett-Packard Inc., which makes both the HP and Compaq brands.

Both IBM and Lenovo have been grappling with the difficulties of turning a profit on PCs, a business that has suffered steep price declines over the past decade thanks to aggressive competition from Dell and upstarts such as eMachines Inc., which was acquired earlier this year by Gateway Inc.

Where an entry-level desktop computer once rarely sold for less than a thousand dollars, consumers can now find powerful, name-brand machines with a wide array of the latest bells and whistles for less than $500, including the monitor.

As a result, despite frequent accolades for many of its ThinkPad laptops, IBM has been shifting focus away from the PC business for years, emphasizing more profitable operations such as technology consulting, systems management, software and outsourcing.

Lenovo, founded in 1984 and formerly known as Legend, currently holds a 2 percent share of the PC market, according to Gartner.

But while Lenovo also has moved to lessen its dependence on PC's by expanding into cell phone manufacturing and information technology services, the company has said more recently it wants to focus on its core computer business again.

IBM, based in Armonk, N.Y., has almost 320,000 employees.