IBM Seeks To Minimize Disruption With PC Sale

Lenovo jumps to No. 3 worldwide; IBM moves into China market
Ken Andre, CIO at packaging company Greif Inc. and an IBM customer, says he's not worried about IBM's sale of its PC business to China's Lenovo Group Ltd., revealed last week. As long as he can purchase high-quality PCs and laptops through his regular IBM sales reps, Andre isn't overly concerned about who manufactures them. "IBM doesn't need to make them, but they need to support our selection and procurement," Andre says.

That's exactly the kind of reaction IBM was hoping for. In crafting the $1.75 billion deal, which in some ways more closely resembles a joint venture than a divestiture, company officials aimed to create an arrangement with Lenovo that would ensure minimal disruption for customers. "We don't view this as exiting the PC business," says Peter Hortensius, VP for products and offerings in IBM's PC group. "We're just doing PCs in a different way."

Lenovo chairman Liu Chuanzhi shakes hands with John Joyce, senior VP and group executive of IBM Global Services, in Beijing last week.

Lenovo chairman Liu Chuanzhi shakes hands with John Joyce, senior VP and group executive of IBM Global Services, in Beijing last week.

Photo by Carlo Cortes IV/Reuters
To that end, Lenovo PCs and laptops will carry familiar IBM brands, such as ThinkCenter and ThinkPad, for at least the next five years and will be sold through IBM's existing sales channels. As for what's under the hood, IBM's entire PC design team will move to Lenovo to ensure quality and innovation, Hortensius says. In total, about 10,000 IBM employees, most of them already in China, will join Lenovo.

Lenovo, founded in 1984 and 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 from Beijing. IBM will hold an 18.9% equity stake in Lenovo and provide the company with a range of IT services.

The deal, expected to close in the second quarter of 2005, is significant for both vendors. Combined with IBM's PC business, Lenovo will initially have revenue from PC sales of about $12 billion, making it the world's third-largest PC vendor. The move completes IBM's departure from the PC business, which, despite $9 billion in sales last year, has in recent years placed 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. "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 also should help IBM increase sales of servers and IT services in China, Foster says.

Beverly Russell, IT director at jam maker E.D. Smith & Sons Ltd., says she views PCs as commodities and is unlikely to switch from IBM. E.D. Smith leases about 60 IBM desktops and 20 ThinkPad laptops. The laptop lease is up for renewal next year, and Russell says she will most likely renew it. Still, Russell has a message for IBM: She'd think twice about buying IBM servers if their production were completely outsourced to a third party. "They're too important to my business," she says. IBM says it has no plans to spin off its server business.

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