China’s largest personal computer maker, Lenovo Group, announced on Wednesday that it is buying control of IBM’s PC business for US$1.3 billion, capping the US giant’s gradual withdrawal from the business it helped to pioneer in 1981.

The deal makes Lenovo the third-largest PC company in the world, moving up from the eighth position.

The agreement calls for Lenovo to pay IBM US$650 million in cash and US$600 million in Lenovo Group common stock. The group will also assume US$500 million in net balance sheet liabilities from IBM. Lenovo is also buying out IBM’s interest in its joint venture with Lenovo rival Great Wall Technology, China’s No. 2 PC maker.

IBM will take an 18.9 percent stake in Lenovo.

With the deal IBM, Lenovo Group Chairman Liu Chuanzhi will retire and incumbent CEO Yang Yuanqing will replace him. Stephen M. Ward, Jr., from IBM will take over as new Lenovo CEO.

The deal is the end of an era for the world’s largest computer company and the dawn of a new age for China's PC industry as Lenovo takes its place as a major international brand and IBM partner.

The sale of IBM’s PC desktop, laptop and notebook computer lines frees the US company to focus on higher-margin businesses such as computer services, software, more powerful server computers, and storage as well as computer chips.

For Lenovo, which is battling intense competition in its home market, the deal with IBM is a breakthrough in its efforts to build its business abroad. It also makes the company part of a small but growing group of Chinese manufacturers buying overseas brands.

Lenovo will take ownership of the IBM “Think” trademark family, including its ThinkPad notebooks and its ThinkCenter desktop line.

Lenovo will hire 10,000 IBM PC employees, including about 2,300 in the United States, largely product designers, marketing personnel and sales specialists. Most of the 7,700 others are in China, where IBM operates a manufacturing joint venture.

Lenovo, founded in 1984 by a group of academics at the government-backed Chinese Academy of Sciences in Beijing, is China’s biggest computer maker and is also the biggest in Asia. Its shares are traded in Hong Kong.

Speculation that IBM was pulling out of the PC business has been rife since the beginning of the month, and rumors began to surface earlier this week that it might be negotiating with Lenovo.

“The bigger the baby, the more difficult the delivery,” quipped Chairman Liu Chuanzhi when asked about the delay in making a formal announcement.

IBM’s computer unit recorded sales of nearly US$13 billion in the 12 months to September 2004, an amount that now accounts for only a small portion of the company's total sales.

Globally, IBM sold 6.8 million PCs in the first nine months of 2004 for a 5 percent market share, according to technology research firm Gartner Inc. That compares with 16.4 percent for Dell and 13.9 percent for Hewlett-Packard.

Both IBM and Lenovo have been grappling with the difficulties of turning a profit on PCs, a business that has suffered steep price declines over the past decade as a result of aggressive competition from such makers as Dell and eMachines Inc. The companies expect that by combining operations, they will be able to cut costs and expand their razor-thin profit margins.

Lenovo faces increased competition at home and in Asia from foreign companies such as Dell. The Beijing-based company, formerly known as Legend, tried diversifying into cell phone manufacturing and information technology services, but with lackluster results. It says it is now focusing on its core computer business again.

(China Daily December 8, 2004)