China's Biggest Computer Maker Announces Acquisition of IBM's PC Business

AP ^ | Dec 7, 2004 | Stephanie Hoo

[Tumbleweed_Connection]

China's biggest computer maker, Lenovo Group, said Wednesday it has acquired a majority stake in International Business Machines Corp.'s personal computer business for $1.25 billion, one of the biggest Chinese overseas acquisitions ever.

The deal shifts IBM to a peripheral role in a corner of the technology industry it pioneered.

It creates a joint venture in which Lenovo Group Ltd. takes over the IBM-brand personal computer business, including research and development and manufacturing, while IBM will keep an 18.5 percent stake in the company, said Lenovo's chairman, Liu Chuanzhi.

The deal makes Lenovo the third-largest PC company in the world, he said.

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.

IBM's computer unit had sales of nearly $13 billion over 12 months ended in September.

Lenovo, founded in 1984 by a group of scholars at the government-backed Chinese Academy of Sciences in Beijing, is China's biggest computer maker and is also the biggest in Asia. Its shares are traded in Hong Kong.

The announcement Wednesday followed reports that a deal was imminent. On Tuesday, 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.

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

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

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.

Once a key player in popularizing the personal computer, IBM is now increasing its focus on consulting, outsourcing and software, analysts say.

Its PC business now accounts for a small portion of its total sales and profits, according to analysts. It ranks a distant third in terms of PC units sold, having surrendered the market lead by the late 1990s, according to the technology research firm Gartner Inc.

Globally, IBM sold 6.8 million PCs in the first nine months of 2004 for a 5 percent market share, Gartner 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.

The companies expect that by combining operations, they'll be able to save money on manufacturing and expand their razor-thin profit margins.

Lenovo faces increased competition at home and in Asia from foreign companies such as Dell. The Beijing-based company, formerly known as Legend, had expanded into cell phone manufacturing and information technology services, with lackluster results. It now says it is focusing on its core computer business again.

IBM was not the first technology company to sell a computer small enough to sit on a desk or table. But it did popularize the idea of a "personal" computer for the mass market with the 1981 introduction of a desktop machine featuring a more user-friendly operating system, a software platform licensed from a then-fledgling company named Microsoft Corp.

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

[durasell]

Probably more than that -- once they get computer manufacturing facilities up and running, they'll be open for "contract work." I don't know where the machines are assembled these days, but you can probably count on them taking a chunk out of any American manufacturing of PCs.

[AgThorn]

Official 'give to clients' comments on agreement from IBM:

---

What did IBM announce today?

We announced an agreement with Lenovo that creates a powerful new leader in the PC industry. Lenovo will acquire IBM’s Personal Computing Division and create a new company that will bring the strengths of IBM’s legendary PC business together with those of Lenovo, that will employ 19,000 people and provide the widest range of PC products and technologies to businesses, worldwide.

The agreement includes a broad-based, strategic marketing alliance under which Lenovo will receive sales and marketing support from IBM, and Lenovo’s products will be integrated into IBM Global Services offerings.

Important for all clients of IBM to know: IBM will provide warranty service and support and financing and leasing options for PC products from the new Lenovo. IBM will take an ownership stake of 18.9 percent in Lenovo, and it will purchase PCs for its own employees from Lenovo as well.

With this agreement, Lenovo becomes the world’s third-largest PC company and a key, strategic IBM business partner. Lenovo will have all of the strengths of IBM’s existing PC division, including research, development, design, and manufacturing capabilities.


What changes for me, the client?

Before the transaction closes in the second quarter of 2005, nothing changes. And after the transaction closes, your experience as an IBM client should be the same. Your IBM sales teams should include the same PC specialists, only they will be Lenovo specialists who will continue working closely together with their IBM colleagues. IBM customers will still have access to the world’s finest PCs, integrated into end-to-end, on demand solutions. And IBM has contracted to support the new Lenovo with the PC service support, and financing -- and the long-term relationships you expect.

Over the longer term, the advantages for our clients are clear. As separate entities, IBM’s PC division and Lenovo had outstanding development, manufacturing, marketing, and client-care capabilities. Together, IBM’s PC Division and Lenovo form a new global enterprise that’s strategically focused on the PC market. IBM will have a powerful new business partner to take the value we can deliver through PC products and services to the next level of excellence. With this new ally, IBM will continue to provide a full range of industry-leading technologies to deliver value to our clients and help them address the toughest business challenges.


Can you tell me more about Lenovo?

Lenovo, which is listed on the Hong Kong stock exchange, is one of China’s largest companies. Created in 1984, Lenovo was the first to introduce the concept of home computers in China. Since 1997 it has been the leading PC brand in China and across Asia, with annual revenues of approximately $3 billion. Lenovo is principally engaged in the manufacture and sale of branded personal computers and handheld devices. With this agreement, Lenovo achieves a size that would have put it into the top five of Fortune Magazine’s annual computer industry ranking.


When will the transaction be completed?

The agreement will be finalized as soon as is practical, and is targeted to be finalized no later than the second quarter of 2005.

It requires the approval of Lenovo’s shareholders, and there will also be regulatory reviews.


Why is IBM making this change?

Our PC business has made tremendous progress over the past several years and extended our market leadership in our targeted business segments.

To build on that success, IBM’s PC division, as part of Lenovo, will be able to compete in all areas of the PC marketplace. The combined company will gain advantages neither PC operation could have on its own, and be a powerful global leader in the $180-billion global PC business.

Working together, IBM and Lenovo will be able to provide excellent value in PCs for companies of all sizes, with the same research and development, quality manufacturing, sales, service, support, financing, and long-term relationships our IBM PC clients have today.


Will the new Lenovo’s products carry the IBM logo and established IBM names like ThinkPad and ThinkCentre?

The new Lenovo’s products will continue to use the ThinkPad mobile and ThinkCentre desktop names, as well as the IBM logo.


Where will Lenovo personal computing products be manufactured?

As with IBM PCs today, Lenovo major manufacturing operations will include locations in China and elsewhere in Asia.

IBM PC research and development facilities in Yamato, Japan and design center in Raleigh, N.C., U.S.A., will also become part of Lenovo. Those resources will give Lenovo IBM’s award-winning design and development expertise in notebook and desktop PCs.


I have a good relationship with my IBM PC rep. today. Will I be working with a different person in the future?

Before the transaction closes in early 2005, of course your current IBM team will continue to work with you as always. After the transaction closes, you should see little change in terms of the people you work with for PC products and services. The PC sales force for the new Lenovo will continue to be integrated into IBM’s sales process, so you’ll still be working with the same team. In most cases, we expect that the PC specialists you work with today will be the same people supporting you as part of the integrated IBM/new Lenovo team.


Will the Lenovo remain committed to the same product roadmap?

There will be no changes to the current roadmap for products. The ThinkPad mobile and ThinkCentre desktop brand names remain the same, and the PCs will continue to bear the IBM name and logo for up to 5 years. The same team that does research, design, and development of IBM PCs today will be doing so for Lenovo, and IBM-branded PCs will continue to offer the highest quality matched by both the lowest cost of ownership and the highest return on investment.

Over time, the best of the IBM and Lenovo product lines will be combined into the Lenovo lineup of industry-leading PC products and services.


What does this mean for PC service and support?

Nothing changes with regard to the level of service, support, or warranty for the IBM PC’s you already have. For investments in ThinkPad mobile and ThinkCentre desktop PCs made after the transaction closes, IBM has an agreement in place to provide warranty service and support for up to five years. Current and future investments in ThinkPad mobile and ThinkCentre desktop PCs are backed by IBM’s warranty service and support.


Will this change affect my pricing?

IBM PCs provide the lowest cost of ownership and the highest return on investment. Lenovo has indicated that it intends to continue to offer these advantages.


If my contract transfers from IBM to the new Lenovo, will any of my terms and conditions change?

No. When the transaction is completed, the new Lenovo will assume all obligations under existing IBM contracts that transfer.


Will this affect supply or delivery?

As we work to complete the transaction, both parties are committed to maintaining the highest levels of service and supply. We do not expect supply or delivery to be adversely affected.


I’ve been hearing from your competitors already. They are saying I should switch to their PCs because of the uncertainties raised by this agreement. Can I be assured I will continue to get the best value for my money in PC investments with IBM and Lenovo?

If you’re hearing from Dell and HP, it’s likely because these PC suppliers are worried. Lenovo will be a strong new competitor for them both in the global PC market, combining all the advantages of IBM and Lenovo’s existing PC businesses into a new company.

The product roadmap is clear – it follows IBM’s current roadmap for 18 months, and then will take the best of both IBM’s and Lenovo’s products as it continues to evolve and develop new technologies. IBM will continue to provide warranty service and support and financing and leasing options as we do today for up to five years. And IBM’s client teams will continue to offer Lenovo PCs as part of our overall solutions to help you apply technology and services to help meet your toughest business challenges.

So you can rest assured that Lenovo will continue the progress that IBM PCs have made: developing innovative personal computing technologies that provide the lowest cost of ownership and the highest return on investment in the industry.

The alliance agreement between IBM and Lenovo is clear, and the path to PC success with Lenovo is clear, so the only uncertainties in the marketplace would be how Lenovo will impact the market share of some of its PC competitors. If you have any questions about this agreement or Lenovo, please let your IBM representatives know and we will be happy to clarify.


What happens after the five-year agreements between IBM and the new Lenovo expire?

Five years in the technology industry amounts to two or three generations of technology, and a few PC “refresh” cycles. While we cannot speculate on business arrangements that may or may not be made in the future, clients should feel confident in continuing to invest in IBM-branded PCs.

As a new global competitor in the PC industry, the new Lenovo adds new scale and market reach to the advantages IBM and Lenovo had with their separate PC divisions. Lenovo represents an even better long-term option for clients looking for the best value in PC products and services.

IBM has long-established relationships with clients, and we remain dedicated to every client’s success. We are confident that our close alliance with the new Lenovo represents not only the best option for our clients’ PC needs, but also the best overall solution for IBM to continue to help our clients achieve their business goals.


Are workstations, Intel-based servers, or any other hardware part of the announcement?

No other IBM products will be part of the new Lenovo. This announcement is specific to personal computers.

IBM continues our strategy of focusing on business and the enterprise in the on demand era, leveraging our strategic, leadership positions in systems, software, and services. We expect that working together, IBM and the new Lenovo will be able to continue to provide our clients with even greater value in PCs as part of that strategy.

[A CA Guy]

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

IBM, based in Armonk, N.Y., HAD nearly 320,000 employees.

[mad_as_he$$]

Do you know what Home Depot pays?

[oceanview]

is that number even US based? they offshore like crazy - India, Brazil, China, etc.

[oceanview]

not yet, not until I'm laid off.

[A CA Guy]

IBM is history though.

[tdewey10]

IBM got out of the business because Dell and HP were killing them. I think this was a sweet move on IBM's part (save for retaining ownership) and a dumb deal for Lenovo. Dell and HP will continue to kill them in the marketplace.

[mad_as_he$$]

yikes. It is not pretty.

[durasell]

Computers are commodities these days. Name brand counts for little. It's all about the price point.

[Petronski]

You rikem Tinkpad? Eight hunred dorrar. At Sam's Crub.

[oceanview]

on price? I can't see how. china has the semiconductor fabs right there, plenty of factories cranking out components, monitors, cheap plastic for the cases - assembling the PC is a perfect low tech macnufacturing job for their slave labor workers.

[CurlyDave]

I wonder what is going to happen with all of the defense contractors who have standardized on IBM computers.

Somehow I very much doubt that Chinese-made computers will be acceptable for either the US government or defense contractors.

[sittnick]

But it did popularize the idea of a "personal" computer for the mass market with the 1981 introduction of a desktop machine featuring a more user-friendly operating system,

Wrong. DOS 1.0 was not significantly "friendlier" than CPM 2.2 or Apple II's OS. IBM's significance was that their getting into the business legitimized in a way that Commodore, Apple, Exidy, Osborne and others couldn't. The deal saddens me. I am the MIS manager for my company, and I avoid buying Red Chinese equipment as well as I can. First, Carly Fiorina chases the engineers out of a company that had the best of them (HP). Now, IBM, whose workstations, servers and notebooks were solid (e.g. Intellistation) even if their Acer-made desktops weren't has sold the whole business to a company owned by the Communist Chinese government! If this keeps up, I am going to wind up buying Intel brand motherboards and assemble the user's computers and company servers myself!

[July 4th]

I built a computer about 2 years ago. Still a great machine. But I think every part was made in either Taiwan or Singapore.

[Dat Mon]

"About 10,000 of IBM's workers will become Lenovo employees as part of the deal."

This means that China is now instantly 'outsourcing' jobs to America!

These numbers will be added into next years statistics thus demonstrating that all is well with the world.

[Dat Mon]

"Computers are commodities these days. Name brand counts for little. It's all about the price point."

I agree for desktops, but not for laptops.

Ive owned several ThinkPads over the years...I try to buy on quality, and of course...American if I can.

I am bummed out thinking I will not be buying another ThinkPad.

Now I think it will be the new Sony Vaio. Dynamite display.

[A. Pole]

China's biggest computer maker, Lenovo Group, said Wednesday it has acquired a majority stake in International Business Machines Corp.'s personal computer business for $1.25 billion, one of the biggest Chinese overseas acquisitions ever.

Is it a joke? It is not April Fool's Day yet.

[durasell]

Figure you go into the local Virgin music or Best Buy store -- oh, look a laptop for $350. Wow!

How can you not buy one and throw it into the briefcase for business trips. If the thing gets damaged, no big deal, just buy another one.

[Happy2BMe]

Mark my words. China will be the world leader in electronics ten years from now.