It's official: The company that helped start the PC market in the early 1980s is exiting the business. Under a blockbuster deal disclosed late Tuesday, IBM will sell its personal-computing business unit to Chinese manufacturer Lenovo Group Ltd. Under the deal, Lenovo will pay IBM $1.75 billion in cash and stock. About 10,000 IBM employees, most of them already in China, will join Lenovo. The transaction is expected to close in the second quarter of 2005.
Lenovo, which was founded in 1984 and has become a pioneer in the Chinese PC industry, will establish its worldwide headquarters in New York, assume control of IBM's PC operations in Raleigh, N.C., and conduct most of its manufacturing operations in Beijing. IBM will hold an 18.9% equity stake in Lenovo and provide the company with a range of IT services. Lenovo also retains the right to use IBM trademarks, including the widely successful ThinkPad laptop brand, for the next five years.
The move completes IBM's exit from the PC business, which, despite generating some $9 billion in sales in 2003, has in recent years been a drag on the company's earnings and profit margins. Analysts blame cutthroat competition from price-slashing competitors such as Dell and low-cost Asian suppliers, including Lenovo itself. Wall Street shrugged off the announcement in early trading Wednesday, with IBM's share price virtually unchanged at about $96.
Some analysts welcome news of the sale. "This is a great move for IBM in terms of boosting margins and profitability," says Chris Foster, senior analyst at Technology Business Research. The deal should also help IBM grow sales of servers and IT services in China, Foster says. "China can be a very difficult market to penetrate without a strong equity partner."
Others, however, are less than optimistic about the deal. "This is not the high-quality firm buying the low-quality firm, it's the other way around," says PC industry analyst and former IBM employee Rob Enderle of the Enderle Group. As a result, Enderle believes the sale "puts IBM's customers at risk."
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