IBM Spins Off PC Division with Chinese Partner

Following days of rumors, IBM late Tuesday made it official: The company said it is spinning off its personal computer business with the Lenovo Group, Chinas biggest maker of personal computers.

In confirming almost a week of speculation, IBM and China-based Lenovo Group Ltd. announced an agreement Tuesday night in which Big Blue will sell its PC division for about $1.75 billion.

The deal, which officials from both companies said will be completed in the second quarter of 2005, will make Lenovo the third-largest PC company in the world, behind Dell Inc. and Hewlett-Packard Co.

The deal creates a joint venture between Lenovo and IBM that will enable Lenovo, through the purchase of IBMs Personal Computing Division, to rapidly grow its computer business beyond China. For IBM, the agreement will enable it to get out from under its PC business but still keep a hand in the game. IBM will buy 18.9 percent of Lenovo, which will become IBMs supplier of ThinkCentre PCs and ThinkPad notebooks.

In addition, IBM, of Armonk, N.Y., will provide maintenance and financing services for the products. The new business will be headquartered in New York and will have about 10,000 IBM employees and 9,000 Lenovo workers.

Stephen Ward, vice president and general manager for IBMs Personal System Group, will become CEO of the new entity, which will have about $12 billion in revenue. Current Lenovo CEO Yang Yuanqing will be president.

/zimages/6/28571.gifJim Louderback says IBMs PC retreat is good business.Click hereto read more.

In announcing the deal, Mark Loughridge, senior vice president and chief financial officer, said the alliance will enable IBM to continue to offer PC products to its customers while also expanding into emerging markets, including China. At the same time, it will free up the company to focus more on higher-end computing products, such as servers.

“This agreement … continues IBMs strategic rebalancing of our portfolio, on the high-value enterprise market segment,” Loughridge said. “It moves our PC business from an element in the IBM portfolio to a key element in IBMs partner network. This partner network consists of business partners that IBM leverages to support its portfolio and integrated businesses. It extends IBMs reach and capabilities in areas where IBM clients are better served with a partner.”

Lenovo will control the IBM brand for five years, and IBM will give marketing and sales support to Lenovo.

The deal with Lenovo is just the culmination of IBMs dance steps with Asian contract manufacturers and computer vendors. IBM first outsourced its desktop PC and later its server and workstation manufacturing to SCI/Sanmina in 2003, and the company merged its hard-disk-drive operations with Hitachi Global Storage Technologies Inc. to essentially exit the hard-drive market.

Next Page: How will the combined PC unit fare globally?

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Analysts were unclear how a combined IBM-Lenovo PC unit would fare in the worldwide market, especially with regard to the ThinkPad, IBMs notebook line.

IBM ranks third in the world in PC sales, while Lenovo is the top vendor in the Asia-Pacific region. But the merged company would be able to take advantage of Chinas low-cost labor force, one that has lagged behind Taiwan in terms of real wages.

“I dont know if itd be so smart a move,” said Charles Wolf, an analyst at Needham & Company in New York in an interview with eWEEK.com before the announcement. In 1999, Wolf wrote a report suggesting that IBM outsource all of its manufacturing—three years before it did so.

“If indeed the buyer is Lenovo, they cant make the PCs any cheaper than Dell does,” Wolf said. In addition, Wolf said he wasnt sure how Lenovo could break into the U.S. market, especially when competing against Dell and Hewlett-Packard.

/zimages/6/28571.gifCheck out analysts take on whetherLenovo Group,Chinas biggest PC maker, is the right choice to take over IBMs PC business.

“Its a risky gambit,” Wolf said, noting that though IBM makes little from the division, the company could be hit with a drop in its core business if customers see a drop in quality or reliability in a product tied to IBMs services and existing server offerings, as the current PC division is.

/zimages/6/28571.gifAnalysts say that IBMs retreat from the PC business couldshift the market balance to Asia.

The new company marks the end of a 23-year run from August 1981, when IBM launched its first IBM PC. While then the leader in mainframe computing, IBM hoped its small, personal computer would provide businesses with a new class of computers and add some revenue. But with the acceptance of the PC by enterprises, the move turned out to be much more than that.

/zimages/6/28571.gifRead a historical analysis covering the rise and fall theIBM PC.

Meanwhile, Gartner, a research firm headquartered in Stamford, Conn., recently released a report positing that three of the top 10 PC vendors would depart the market by 2007. Now the countdown begins for the other two makers.

The report cited a halving of sales growth and profit margins for the period 2006-08, compared with 2003-05, as the primary cause. Gartners analysis showed a drop in growth rates from 11.3 percent to 5.7 percent annually, and revenue growth down to 2 percent from 4.7 percent.

The top 10 vendors include Dell, HP, IBM, Fujitsu/Fujitsu Siemens, Toshiba Corp., Acer America Corp., NEC Solutions, Legend, Gateway Inc. and Apple Computer Inc., determined by unit shipment. The report singled out the PC divisions of HP and IBM as vulnerable to being sold or spun off, “if their drag on margins and profitability are deemed too great by their parent companies.”

IBMs PC division has not recently shown a loss, but profits have been nearly negligible—less than $100 million in the past year.

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