Lenovo, China's biggest PC maker, and IBM signed an agreement under which Lenovo buys IBM's PC unit for US$1.25 billion.
China's largest personal computer maker, Lenovo Group Ltd., said on Wednesday it is buying control of IBM's PC-making business for $1.25 billion, capping the U.S. tech giant's gradual withdrawal from the business it helped pioneer in 1981.
The agreement, which forms the world's third largest PC business, calls for Lenovo to pay IBM $650 million in cash, $600 million in Lenovo Group common stock and for Lenovo to assume $500 million in net balance sheet liabilities from IBM.
IBM will hold an 18.9 percent stake in Lenovo.
With the deal IBM, Lenovo Group Chairman Liu Chuanzhi will retire and Lenovo CEO Yang Yuanqing will become the new chairman, and Stephen M. Ward,Jr. from IBM will take over as new Lenovo CEO.
A Lenovo advertisement in Beijing. [Xinhua]
The deal closes an era for the world's largest computer company and kicks off a new age in which China's top PC maker Lenovo steps onto the world stage as a major PC brand and IBM partner.
The sale of IBM's PC desktop and notebook computer lines frees the company to focus on higher-margin businesses such as computer services, software, more powerful server computers, and storage as well as computer chips, analysts have said.
For Lenovo, which is battling intense competition in its home market, the deal with the world's largest computer company marks a breakthrough in its efforts to build its business overseas. It would also make the company part of a small but growing group of Chinese manufacturers buying overseas brands.
Lenovo will take ownership of IBM "Think" trademark family, including its ThinkPad notebook brand and its ThinkCenter desktop line. Lenovo will also buy out IBM's interest in its joint venture with Lenovo rival Great Wall Technology, China's No. 2 PC maker.
Lenovo will hire 10,000 IBM PC employees -- including about 2,300 in the United States -- mostly product designers, marketers and sales specialists -- and some 7,700 elsewhere, principally in China, where IBM operates a manufacturing joint venture. IBM, based in Armonk, N.Y., has nearly 320,000 employees.
The deal makes Lenovo the third-largest PC company in the world.
Like other major Chinese manufacturers hoping to expand overseas, Lenovo is planning to leverage a well-known foreign brand name. Lenovo Chairman Liu Chuanzhi 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.
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