Lenovo takes on PC hurdles
By Ellen Simon
Associated Press
NEW YORK — In unloading its personal computer business for $1.75 billion to a Chinese company, IBM managed to keep the division's most profitable pieces — services and support. The onus is now on buyer Lenovo Group Ltd. to improve the notoriously thin profit margins of the business, and the skeptics are many.
On its face, the merger creates the third-largest PC business in the world, with approximately $12 billion in 2003 revenue and an 8 percent market share.
The risk for Lenovo is that it might not add up so easily.
"Judging from past PC-related acquisitions, the acquiring company struggled and typically ended up giving up market share," Goldman Sachs analyst Laura Conigliaro wrote in a research note.
In past mergers, such as Gateway Inc. and eMachines Inc., and Hewlett-Packard Co. and Compaq Computer Corp., the combined companies' market share turned out to be less than the individual merged companies, Conigliaro wrote.
Because some business customers like to buy their entire information technology system and support from a single vendor, this may hurt the combined company, said Alan Promisel, an analyst at IDC.
Another hurdle is that in the years since Lenovo was founded in 1984, it has made its name selling cheap PCs, said Forrester Research analyst Simon Yates. More high-end PCs are selling in China, but the bulk of the Chinese market is still low-cost PCs.
"They may have bought things they can't sell," he said.
Although Lenovo, which has 9,000 employees, is getting a 10,000-person team from IBM and a new chief executive, IBM's Stephen M. Ward Jr., what they're mostly buying is "a number of intangibles," Citigroup analyst Richard Gardner wrote in a research note.
Those include the IBM logo and the company's existing customer relationships, which is one reason Gardner joins other analysts in predicting the company will lose market share to Dell and, to a lesser extent, Hewlett-Packard.
The biggest challenge, said Promisel, "In the PC business, as IBM found out, it's difficult to squeeze out a profit."
Lenovo's obvious hope is that the acquisition will help it gain traction in China's booming economy and win customers in the United States.
For IBM, the reasons to leave the PC market were glaring.
The company had outsourced most of its manufacturing years ago, selling the last PC plants it owned alone in 2003.
Since their introduction, the company's PCs used a Microsoft Corp. operating system and Intel Corp. chips. The only thing that made them unique was their design, and that wasn't enough to let IBM set above-market prices.
CEO Sam Palmisano said in an e-mail to employees that IBM was getting out of the PC business because it had become too much like consumer electronics, which relies heavily on individual consumers and depends on economies of scale.
