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Wed 8 Dec 2004 04:00 AM

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IBM logs out of PC business

On August 12, 1981, IBM unveiled its pioneering Personal Computer. Now 23 years later, Lenovo Group, the largest PC vendor in China will acquire Big Blue's ailing PC manufacturing division for US$1.75 billion to create the world’s third largest PC business.

Lenovo Group, the largest PC vendor in China has confirmed a definitive agreement under which Lenovo will acquire IBM’s Personal Computing division to form the world’s third largest PC business.

The deal involves US$1.25 billion in cash, equity and total transaction consideration of US$1.75 billion. IBM and Lenovo expected the deal to be completed in the second quarter of 2005.

Faced with wafer thin margins of a few percent and aggressive competition from the likes of Dell, HP and other low-cost PC vendors IBM has been fighting a losing battle in the desktop business. However the key point behind the deal is IBM is only exiting the PC manufacturing business, not the PC business per se.

The move is similar to Taiwanese vendor Acer, which does not build any PCs or notebooks and relies totally on third party contract assemblers and manufacturers, brands them through its sales and marketing outfit. The Lenovo-IBM deal is of a similar nature.

IBM's sell out also validates a new report by market research firm Gartner, which recently predicted that with consolidation in the near future, three out of the top 10 PC makers are likely to be forced out of the market by 2007. Gartner also predicts growth in PC shipments will average about 5.7% over the next four years, which is half the rate of the past two years.

Lenovo will have combined annual PC revenue of approximately US$12 billion and volume of 11.9 million units, based on 2003 business results -- a four-fold increase in Lenovo’s current PC business. Lenovo’s new PC business will benefit from a worldwide distribution and sales network covering 160 countries, selling under IBM’s “Think” brand notebook franchise and Lenovo’s brands in China.

As part of the transaction, Lenovo and IBM will enter a broad-based, strategic alliance in which IBM be the preferred services and customer financing provider to Lenovo. The Chinese major will also be the preferred supplier of PCs to IBM, enabling IBM to offer a full range of products to its customers.

Stephen M. Ward, Jr., currently IBM senior vice president, and general manager of IBM’s Personal Systems Group, will serve as the chief executive officer of Lenovo following completion of the transaction.

Yuanqing Yang, currently vice chairman, president and chief executive officer of Lenovo, will serve as the chairman of Lenovo post-transaction.

Chuanzhi Liu, current chairman and founder of Lenovo Group says, “I am excited by this breakthrough in Lenovo’s journey towards becoming an international company. Over the past 20 years, I’ve watched Lenovo develop into the leading IT company both in China and throughout Asia. Since the beginning, however, our unwavering goal has been to create a truly international enterprise.”

IBM will have an 18.9% ownership share in Lenovo Group and is expected to recognise a gain on the sale following completion of the transaction. There will be minimal financial impact resulting directly from the transaction to IBM’s fourth quarter 2004 results.

“Today's announcement further strengthens IBM’s ability to capture the highest-value opportunities in a rapidly changing IT industry," says Samuel J. Palmisano, IBM chairman and chief executive officer. "Over the past several years, we have aggressively repositioned IBM to be the world’s leading provider of innovation-enabled solutions."

While the transaction is being completed, both companies expect their existing PC operations, including customer service and product availability, to continue as usual. Following the closing of the transaction, Lenovo expects customer service and product availability will continue as usual as the two companies’ operations are integrated.

IBM Middle East wasn't available for comment on the impact of the acquistion deal on its regional operations at the time of going to press.

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