China’s Lenovo buys IBM’s PC Division

After a week of rumour and speculation, Chinese computer manufacturer Lenovo has bought IBM’s Personal Systems Division for around $1.75 billion.

IBM will also gain a 18.9 per cent stake in Lenovo and Stephen Ward, IBM’s current general manager for the personal systems group will become CEO of Lenovo based in New York. The current CEO Yuanqing Yang, the company’s current CEO will move up to become Chairman.

The new Lenovo will have combined revenues of $12 billion and sales of almost 12 million PCs and notebooks based on 2003 numbers which will immediately put the company third in the world for shipments behind Dell and Hewlett Packard.

The new combined company will have 19,000 employees, 10,000 of which will be former IBM staff. 40 per cent of those are already in China through the manufacturing facilities the company owned jointly with Great Wall computers in International Information Products.

Lenovo not only gains the IBM product range, distribution, operations and R&D facilitiies but also, crucially the ‘Think’ and IBM brand names. Big Blue will also become Lenovo’s preferred service provider and customer financer.

Lenovo will also benefit from marketing and sales leads provided by the company’s 30,000 strong sales force and through IBM.com. Of course, Lenovo will be IBM’s preferred supplier of PCs to IBM in all business segments from enterprise down to small businesses.

Under the terms of the deal, due for completion by the end of Q2 2005, IBM will receive $650 million in cash and $600 million worth of Lenovo shares currently traded on the Hong Kong stock exchange. IBM will also take over some $500 million worth of liabilities from IBM. Lenovo will be paying for IBM’s PSD through its own cash reserves and through borrowing.

It goes without saying that this is a great leap forward for Lenovo. Although a major supplier of PCs in China, the fastest growing market for computers in the world, it is virtually unknown outside the People’s Republic. Suddenly it is now the third biggest manufacturer in the world with lines into some of the world’s biggest corporations that many of its rivals would die for. It also has the backing of the world’s biggest computer company.

From IBM’s point of view, it gets out of a market that had become less and less in tune with the company’s long term strategy. Unwilling to position itself effectively against the mail order strategy of Dell the company had found its products forced back into its corporate strongholds. Its brand reputation, although high in business, was a positive turn off for customers who assumed that ‘IBM’ meant suited and booted and not consumer friendly. Lenovo may be able to give the PSD a fresh start in the consumer market. The new company will also have a huge advantage when it comes to selling PCs to the largest population in the fastest growing economy in the world.

For IBM as a whole, it allows the company to concentrate more on its strengths in R&D, consultancy and services and hardware development where it can genuinely add value. From Big Blue’s point of view the PC that it gave birth to has become a commodity product that it could no longer gain sufficient margin.

IBM’s PSD in the UK will be separated and will be setting up business away from IBM’s headquarters on London’s south bank and in Basingstoke.

For the industry as a whole, it marks the end of an era. The IBM PC, launched in 1981 changed the world. It’ll be strange without it.