Posted on 12/13/2004 8:59:56 AM PST by maui_hawaii
In July 2003, Sam Palmisano, the chief executive of IBM, traveled to Beijing to explore the sale of the company's personal computer business. But he did not start by making the usual visit with executives of IBM's preferred partner, Lenovo, China's largest personal computer maker.
Instead, Palmisano first engaged in a bit of old-fashioned courtship. Before formally approaching Lenovo, he sought permission from the parents, by meeting privately with a senior Chinese government official in charge of economic and technology policy.
IBM was not merely looking to sell its PC business, Palmisano told the official, but had bigger aspirations of creating a global enterprise, with IBM contributing technology, management, marketing and distribution.
The idea, Palmisano explained, would be to build a modern and truly international Chinese-owned corporation. The move, he added, would demonstrate China's desire to take that next step toward economic maturity by investing abroad instead of merely serving as a manufacturing hub for the rest of the world.
The senior Chinese government official, Palmisano recalled, responded, "That is the future model for where we see China headed."
Permission was granted.
Inside IBM, the issue of whether to stay in the personal computer business has been debated for a decade. But the road to the Lenovo deal, according to IBM executives, began in 2000, shortly after Palmisano became the company's president and chief operating officer. He ordered an extensive review of the PC business and decided to stop selling IBM PC's through retail stores.
At about that time, IBM approached Lenovo for the first time, according to a person close to Lenovo, seeking to sell its PC business for $3 billion to $4 billion. At the time, IBM had let its investment bankers know that if an attractive offer came up for the PC business, it would certainly consider a sale. But IBM executives say that any discussion in 2000 was probably a prospecting overture by an outside adviser representing the company.
In May 2002, Palmisano directed John Joyce, then IBM's chief financial officer, to meet with Lenovo's senior management to sound out the company's interest in establishing a business relationship. Lenovo, according to IBM executives, was intrigued and had long been exploring ways to increase its international presence.
More than a year later, at the meeting in Beijing, the government official told Palmisano that a few years earlier the Chinese authorities would have been involved in such talks. But times had changed, the official said, and Lenovo and IBM could negotiate by themselves.
By October 2003, IBM resumed discussions with Lenovo. In March, Palmisano went to Beijing to meet with Lenovo's founder, Liu Chuanzhi, as well as its president, Yang Yuanqing, and the chief financial officer, Mary Ma. That was when Palmisano fully described what he had in mind. "I put it all on the table," he said.
Lenovo was definitely interested, though any such deal would be complicated. Many of the essential elements of the deal were hammered out over eight days in June, in a hotel near Raleigh, N.C., where IBM's PC business is based. The principal negotiators
included Joyce, who now heads IBM's services business, Stephen Ward Jr., an IBM executive who will become chief executive of the Lenovo PC business, and Yang.
There were other interested bidders, including one from an American buyout firm whose offer remained on the table until the end. And the Lenovo deal could have fallen apart. But apparently the Chinese option was the only one seriously pursued by IBM.
"There were simpler transactions we could have done," Palmisano said, adding, "What we wanted was not a divestiture, but this strategic relationship with Lenovo and China."
The sale of IBM's personal computer business to Lenovo for $1.75 billion, announced last Tuesday, is "a three-dimensional deal," Palmisano said. The sale provides IBM with a path to leave a business that is large but not profitable. It is also the latest step in IBM's shift toward services, software and specialized hardware technology from mainframes to microprocessors for computer game consoles, all of which promise higher profits than the fiercely competitive PC business.
Yet the most intriguing, and potentially most important, dimension of the deal for the company is that it is IBM's China card. The new Lenovo, folding in the IBM personal computer business, will be China's fifth-largest company, with $12.5 billion in sales in 2003, and the Chinese government will remain a big shareholder. IBM is eager to help China with its industrial policy of moving up the economic ladder, by building the high-technology engine rooms to power modern corporations and government institutions with IBM services and software.
The deal is not expected to face any regulatory hurdles. Although there is a requirement, dating back to the era of the cold war, for review of possible national security implications, officials in Washington told IBM executives in advance of the announcement that clearing it would not be a problem.
The pact could give IBM "an extremely important leg up in China," Laura Conigliaro, an analyst with Goldman, Sachs, whose investment banking arm advised Lenovo, wrote in a report last week. "Ultimately, this is the single most valuable benefit to IBM from this transaction."
The payoff for IBM, if any, will come gradually. The Lenovo deal, in which IBM will take an 18.9 percent stake in the Chinese company, is a sign of IBM's commitment to China. IBM is placing 10,000 of its employees, its brand for five years and some its prestige in Lenovo's hands. There is a lot more at stake than the $1.25 billion in cash and stock Lenovo is paying, and $500 million in debt obligations it will assume.
In China, IBM is using a variation of the globalization formula that has worked well for it in Japan, Europe and elsewhere. IBM patiently nurtures close ties with the government and becomes a premier employer and a stellar corporate citizen--so much so that it is eventually regarded more like a local company than an outsider.
"We don't have any special deal with the Chinese government or any other government really," Palmisano explained last week over lunch at IBM headquarters. "It's a much more subtle, more sophisticated approach. It is that if you become ingrained in their agenda and become truly local and help them advance, then your opportunities are enlarged.
"You become part of their strategy," he added.
IBM is no newcomer to China. It set up a business there 20 years ago, and there are now 4,200 IBM employees in China. In 1995, the company opened a research laboratory, which now employs 150 Chinese scientists. Five years ago, IBM established a Chinese software development lab, which today has 500 engineers working on Linux projects alone. (IBM is the leading corporate supporter of Linux, a free operating system that is an alternative to Microsoft Windows.)
With the Lenovo deal, IBM is forging even closer links with China. While there were other offers for its PC business, Palmisano pushed hard for this deal--more a bridge to another economy than a simple sell-off.
Palmisano, 53, who became chief executive in 2002, is the leader of a generation of executives groomed to run a corporation that is based in the United States but gets the majority of its revenue abroad, as IBM does today. Traveling extensively is part of the regimen, as are stints of living abroad.
Palmisano managed IBM's large business in Japan in the early 1990s. He traveled extensively in Asia, including China, and continues to do so as chief executive. He makes three or four trips a year to China on business, and last summer he spent two weeks traveling across the country with his four children. "It was so they could get a feel for the Chinese culture and what's going on there," he said. "China is going to be such a huge influence in the world in their lives."
IBM's departure from the personal computer industry, Palmisano insisted, does not mean that the PC business is a bad one. But it does signal that it is no longer crucial to IBM's strategy of emphasizing services, software and server computers for corporate customers.
In an e-mail message to employees last week, Palmisano explained how the company's strategy and the PC business had parted ways. Today, there are two ways to create long-term value for information technology customers and shareholders, he wrote: "Invest heavily in R&D and be the high-value innovation provider for enterprises, or differentiate by leveraging vast economies of scale, high volumes and price."
IBM is choosing the first path, and has decided that the PC business is inevitably on the second path.
While not specifically, this type of transaction was predicted a long time ago. There are three main forces at work here.
First, US companies are chomping at the bit to get into China but are having hell tapping the market there. Who else better to do that than the Chinese?
IBM just placed itsself as a rider on a Chinese company being able to effectively tap China. Its much more important to them than selling their PC division.
Two, the PC industry is playing out in large part. Its not what it once was in many ways. Of course it still has life, but PCs are becoming commodity items, especially in the west.
Third, China has a desire to expand from manufacturer to actual businessman. They want to have their corporations with a global reach and fully move up into what other countries have been doing for years. They are in essence wanting to move up the chain into an investor class, of sorts.
There have been several brands of Chinese origins that have done this already, and more are on the way.
In essence IBM is getting rid of its baggage and is picking up part of a company that is dynamic to China. The Chinese are also picking up insta-global presence.
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IBM has reached an agreement in principle to sell its personal computer business to Lenovo, China's largest PC maker, in a deal valued at between $1 billion and $2 billion, people close to the negotiations said Monday.
The sale is expected to be announced on Wednesday morning in China, these people said; that is Tuesday night in the United States. But the deal is complex, these executives cautioned, and the timing could slip or the companies could fail to reach a final agreement.
Trading in the shares of Lenovo Group, formerly known as Legend, was suspended yesterday on the Hong Kong stock exchange. Later in the day, the company announced that it was engaged in "acquisition talks with a major international technology company."
The tentative deal would include features to retain IBM customers and maintain the IBM brand for a bridge period of a few years, people close to the talks said.
The goal, they added, would be to make the transfer of the business as smooth as possible and give Lenovo the best chance of retaining IBM customers. For a period, IBM would provide assistance with technical support and financing and access to IBM sales channels outside of China, these people said.
Providing these services would bring fees to IBM, and give the company a continuing stake in Lenovo's success.
If IBM retained the technical support and financing parts of the business for a period, these could also have the effect of reducing the purchase price for Lenovo, according to industry analysts.
Technical support and financing, they said, tend to be steady and profitable businesses for PC companies because they are immune to the up-and-down cycles of the hardware business. So if Lenovo is only acquiring the PC hardware operations at first, the cost to the Chinese company might be reduced, they said.
Analysts also noted that Lenovo, which is partly owned by the Chinese government, might also be an attractive customer for IBM's business consulting practice, providing Lenovo with management expertise and technical skill as it strives to become a force against the likes of Dell and Hewlett-Packard in the global PC industry.
For IBM, the sale of its personal computer business would enable it to focus its strategy on services, software and on selling large servers that power corporate networks and the Internet. The IBM server business, unlike its PC division, is consistently a profit leader for the company.
IBM does not break out the size of its personal computer sales precisely as part of its personal systems group, which includes computerized cash registers and hand-held computers used in retailing. But analysts estimate the PC revenues at $10 billion a year, with the business hovering at break-even.
A sale would not have much of an impact on IBM's profits, analysts said, but it would remove a potential drag on its earnings and free up resources for the businesses that it is betting on for future profit growth.
ping
NEW YORKIBM announced late Tuesday the sale of its personal computer business to Lenovo, Chinas largest personal computer maker, a deal that reflects the industrial and economic ambitions of not only the two companies but also their two nations.
Under Lenovos ownership, the IBM personal computer business will continue to be based in the United States and run by its current management team. IBM will take a stake of 18.9 percent in Lenovo, which is based in Beijing, but now plans to have headquarters in New York.
The significance of the deal may exceed the relatively modest amount that Lenovo is paying: a total of $1.75 billion in cash, stock and debt.
The transactionword of it began circulating late last weekpoints to the rising global aspirations of corporate China as it strives to become a trusted supplier to Western companies and consumers. The sale also signals a recognition by IBM, the prototypical American multinational, that its own future lies even farther up the economic ladder in technology services and consulting, in software and in the larger computers that power corporate networks and the Internet.
All of those are businesses far more profitable for IBM than its personal computer unit.
SCRAMBLING FOR CHINA
But the move signals an acknowledgment by IBM that its future in China may be best served by a close partnership with a local market leaderparticularly one, as in Lenovos case, that is partly owned by the Chinese government. The chief executive of Lenovo will be Stephen M. Ward Jr., currently an IBM senior vice president in charge of the PC business. Lenovos current chief and president, Yang Yuanqing, will become Lenovos chairman.
American companies, in one industry after another, are scrambling to take advantage of the vast potential of the Chinese market. Chinese companies like Lenovo, meanwhile, are increasingly seeking to tap into overseas markets, management expertise and technological skill.
This is an encouraging sign of the increasingly sophisticated transpacific ties between the United States and China, said Timothy F. Bresnahan, an economist at Stanford University. Seeing the Chinese seeking these kinds of economic links can only be a good thing.
The complex transaction is meant to serve as a bridge between very different companies from different cultures, by seeking to ensure that IBM has a stake in the Chinese companys success. Whether in the United States, in China or anywhere else in the world, such a stake would be in IBMs self-interest; a messy exit from the personal computer industry could rankle corporate customers, hurting IBMs other businesses, and tarnish its stellar brand name.
IBM has agreed to hold onto its stake in Lenovo for three years, the companies said, with an option of extending it. IBMs financial commitment to Lenovo could help open doors for its efforts to win other business in China.
The senior management of the current personal computer business will join the Chinese company, led by Ward and Fran OSullivan, the general manager of IBMs personal computer division.
Besides management expertise, Lenovo would be acquiring five-year brand-licensing rights to a computer business best known for its IBM Thinkpad notebooks, its sleek black desktops and the product lines distinctive tricolor IBM logo.
While Lenovo will have its headquarters in New York, the hub of the IBM PC business is in Raleigh, North Carolina, where its design and development operations are based. IBM employs about 10,000 people worldwide in its PC business, although fewer than a quarter of those workers are in the United States. In fact, 40 percent are already working in China.
Under the agreement, IBM will continue to handle technical support, financing and warranty coverage globally for its former personal computer division. Those tend to be steady and profitable cash-generating businesses, even as the PC business itself has been only intermittently profitable for IBM lately.
DISTANT THIRD
It was IBM that moved the personal computer industry from a hobbyist market into the corporate and consumer mainstream, with its first PC in 1981. But as the company lost its PC market leadership to nimbler players, the company has pulled back its commitment to the business in recent years, first by getting out of retail sales and, in 2002, passing off its desktop PC manufacturing to a Silicon Valley contractor, Sanmina-SCI.
Today, IBM is a distant third in worldwide PC market share, behind Dell and Hewlett-Packard. IBMs personal computer sales are about $10 billion a year, or about 11 percent of its $89 billion in revenue, but it has hovered between slight profits and losses in recent years.
In its hasty entry into the PC business in the early 1980s, IBM made what turned out to be a strategic mistake: It chose outside suppliers for the crucial technologies of the microprocessor and the software operating system, helping Intel and Microsoft become two of the most profitable companies in the world.
For nearly a decade, executives have debated dropping out of the personal computer business.
Samuel J. Palmisano, who became IBMs chief executive in 2002, finally made the move. He decided that the companys management and investment resources would be better used in its other businesses like software and services to help customers use information technology to help automate business tasks from product design to procurement.
The PC business is just not that important anymore to IBM strategically, said A.M. Sacconaghi, an analyst at Sanford C. Bernstein & Co. Palmisano has decided to focus instead on businesses that are more profitable for IBM and promise higher growth.
In a statement, Palmisano said the PC industry continues to take on the characteristics of the home and consumer electronics industry which favors enormous economies of scale and a focus on individual users and buyers, while IBM will focus more on the corporate market.
NO GUARANTEES
Still, industry analysts say, it is not clear that a business that was struggling under IBM will thrive under Lenovo. Worldwide growth in PC sales, according to Gartner, a research firm, will slow to about 2 percent a year from 2006 to 2008, less than half the projected revenue gains of 4.7 percent a year from 2003 to 2005. The number of PC makers, analysts say, will probably be winnowed in the next few years.
Lenovo aspires to become a major international player and a recognized brand, a company with the ability to sell into multinational corporations and be profitable, said Leslie Fiering, an analyst for Gartner.
This deal improves its chances, but the business is only going to get tougher over the next few years.
The personal computer industry, like most technology businesses, is not one in which low labor costsone of Chinas advantages in competing with Western rivalsare much of an edge. The big winner in the business, Dell Inc., is mainly a master of ultra-efficient management of its suppliers, assembly and distribution.
IBMs rivals said the Lenovo purchase would create uncertainty among customers and provide opportunity for them. Its hard to think back on a successful large merger in the computer industry, and I dont see this one being different, Michael S. Dell, chairman of Dell, said Tuesday. We like to acquire our competitors one customer at a time.
The "tame" analysts alluded to were not the ones currently driving IBM prices down. Lack of manufacturing control, basically means the end for IBM in this niche. 205 of nothing, is still nothing. Lenovo will never issue a dividend. This was accurately labeled a "mess of pottage." IBM is selling its, and America's, birthright.
Oops. That was supposed to be 20% of nothing not 205....
REYNOLDS, THOMAS M VIA REYNOLDS FOR CONGRESS |
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06/30/2004 | 1000.00 | 24961837427 |
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07/06/2004 | 1000.00 | 24962529260 |
JOHNSON, NANCY L VIA JOHNSON FOR CONGRESS COMMITTEE |
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06/10/1998 | 1000.00 | 98033221058 |
SCHUMER, CHARLES E VIA FRIENDS OF SCHUMER |
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09/18/2002 | 1000.00 | 23020092273 | |
05/27/2003 | 1000.00 | 23020310394 | |
05/27/2003 | 1000.00 | 23020310394 |
PELOSI, NANCY VIA NANCY PELOSI FOR CONGRESS |
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07/26/2004 | 1000.00 | 24981335250 |
BUSH, GEORGE W VIA BUSH-CHENEY '04 (PRIMARY) INC |
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DAVIS, THOMAS M VIA TOM DAVIS FOR CONGRESS |
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07/12/2004 | 1000.00 | 24971659704 |
Not a real conservative in the bunch. Pelosi and Schumer, Shays et al. The nominal republican support, GWB and the congressional candidate...all apparently uncommitted to U.S. industry...just lining up behind the CEO's who don't give a rats patoot. Follow the Money. Remember, that is what we always said with Xlinton...and it was true.
As for Dell et al, going into China thats a good question.
I think they (Dell) will do what they are doing... same strategy, only in China... offer better customizable products. Don't be suprised to hear something like "Dell only has 5% of the Chinese market, but their company represents 50% of industry profits in China"
They are not stressing over China, and rightfully so.
Plus Lenovo (aka Legend) is a state corporation (one of the multitudinous 'partially govt owned' Chinese corporations). Basically that means the govt controls it and owns 49.9% of it, but they label it as "private".
In essence no one else will be allowed to have anything other than a niche market, especially if they are going to try and send the profits back to Wall Street...
I think Dell knows this. As does IBM, hence IBM has a rider in the Chinese market. Its kind of going with the flow of the powers that be.
If Dell (or anyone else) partners with a Chinese company then they might get some more of the Chinese market, but I don't expect it to happen to any sizeable extent. Dell doesn't want to open its secrets and vaults up to people they don't trust, not to mention for a mere shot at a so-so market.
As American entities...it's coming...and sooner than you think. So the time to be worried isn't then, it was a long time ago. These kinds of economic Perfect Storms that will strip the U.S. of its key industries are not accidental. They are by Chinese design.
I wouldn't expect a whole lot from this.
My high peformance PC cost me around 1500. And the video card cost 300. Plus with self built I know everything that is in there.
Another American Success sold to foreign company once again. Where is the pride in the firms with Made in USA products?
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