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IBM and Lenovo have confirmed the plans to merge PC businesses of each other. The transaction will result in Lenovo’s buy-out of IBM’s PC Business for about $1.75 billion and will allow Lenovo to become the world’s No. 3 maker of PCs with strong presence across the world.

Under the terms of the agreement Lenovo will not only be able to sell desktops and notebooks under IBM and “Think” brand-names for the next five years, but will also get IBM’s sales network. Additionally, Lenovo will become preferable supplier of computers to IBM, who will then offer the PCs to its business clients worldwide. Furthermore, IBM’s leasing and maintenance units will be preferable providers of appropriate services to Lenovo and its clients.

Lenovo – Supplier of Nearly 12 Million PCs Yearly

Together with IBM’s PC business, Lenovo will have combined annual PC revenue of approximately $12 billion and volume of 11.9 million units, based on 2003 business results – a fourfold increase in Lenovo’s current PC business.

Lenovo’s new PC business will benefit from a powerful worldwide distribution and sales network covering 160 countries, global brand recognition through the combination of IBM’s highly regarded “Think” brand notebook franchise and Lenovo’s leading brand recognition in China, enhanced service and support for consumers and enterprise clients, and consumer strength and market leadership in China, the world’s fastest growing IT market. After the transaction is completed, Lenovo will boast leading notebook enterprise offerings, leading R&D and expertise in product differentiation, ensuring greater innovation and enhanced product selection for customers.

As part of the transaction, Lenovo and IBM will enter a broad-based, strategic alliance in which IBM will be the preferred services and customer financing provider to Lenovo. Lenovo will be the preferred supplier of PCs to IBM, enabling IBM to offer a full range of personal computing solutions to its enterprise and small and medium business clients.

Chinese Company to Integrate All Operations of IBM’s PC Unit

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.

As part of the strategic business alliance, IBM will provide marketing support and demand generation services for Lenovo products through IBM’s existing enterprise sales force of approximately 30 000 professionals, and through IBM.com. Lenovo products will also be sold through IBM PC specialists that will join Lenovo. IBM Global Financing and IBM Global Services, a leading IT services organization in the world with powerful existing enterprise channels, will be preferred providers to Lenovo for leasing and financing services, and for warranty and maintenance services, respectively.

Lenovo Group will locate its PC business worldwide headquarters in New York, with principal operations in Beijing and Raleigh, North Carolina, and sales offices throughout the world.

Upon completion of the transaction, Lenovo will have approximately 19 000 employees. Approximately 10 000 current IBM employees – more than 40% of whom already are in China and less than 25% of whom are in the United States – will join Lenovo. The transaction is expected to have minimal impact in the aggregate on employment, benefits and compensation in either company.

Transaction Details

As consideration for the transaction IBM will receive at least $650 million in cash and up to $600 million in Lenovo Group common stock, subject to a lock-up period expiring periodically over three years. IBM will be Lenovo’s second-largest shareholder, with an 18.9% interest in Lenovo. Additionally, Lenovo will assume approximately $500 million of net balance sheet liabilities from IBM.

Lenovo will fund the cash portion of the consideration through internal cash and debt. The equity issuance price will be HK$2.675 ($0.35) per share and is based on the closing price as of December 3, 2004.  The transaction is expected to be completed in the second quarter 2005 and requires the approval of Lenovo’s shareholders and review by relevant regulatory organizations.

The PC manufacturing portion of the International Information Products Company in Shenzhen, China, which is co-owned by IBM and Great Wall, is included in the transaction; IIPC’s IBM eServer xSeries manufacturing there is excluded.

IBM’s General PC Unit Manager Becomes New Company’s CEO

Stephen M. Ward, 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.

Both Companies’ Execs Welcome the Move

“As Lenovo’s founder, 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. From 2003 when we changed our international brand name to 2004 when we announced our partnership with the International Olympic Committee, to today’s strategic alliance with IBM, I have been delighted to watch Lenovo become a truly world-class company,” Chuanzhi Liu, current chairman of Lenovo Group, said.

“Today’s announcement further strengthens IBM’s ability to capture the highest-value opportunities in a rapidly changing information technology industry. Over the past several years, we have aggressively repositioned IBM to be the world’s leading provider of innovation-enabled solutions for businesses and institutions of all sizes, in all industries. This requires single-minded focus on the business client and significant ongoing investments in R&D and the creation of intellectual capital. At the same time, the PC segment of the industry continues to take on characteristics of the home and consumer electronics industry, which favors enormous economies of scale and a focus on individual users and buyers. Today’s announcement further strengthens IBM’s focus on the enterprise, while creating a new global business that is better positioned to capture the opportunities in the PC industry going forward,” said Samuel J. Palmisano, IBM chairman and chief executive officer.

Further Market Share Increase Possibilities

Lenovo Group and International Business Machines have totally different business goals and approaches. If IBM has been gradually withdrawing from PC business going to more profitable service and back-end servers business, Lenovo Group has been historically concentrated on manufacturing of personal computers.

IBM has been pulling out of the PC business for some time now. In the late nineties the company ceased to sell its desktops in retail stores, in 2002 it announced huge PC outsourcing deal after selling its fabs to Sanmina-SCI and spun off its storage division that was then acquired by Hitachi. All-in-all, for IBM getting away from PCs to high-margin enterprise-oriented businesses is a plan that has been executing well for years now.

While theoretically global presence of IBM-branded PCs may increase, given that Lenovo is likely to offer more competitive pricing on IBM’s PCs, the practice of merges shows that market share of a single company after the merge is lower compared to aggregated market shares of the two companies before the merge.

Still, any substantial market share changes are unlikely to happen in the short term, given that IBM’s clients are pretty loyal and are assured by IBM that the PC business will continue to operate without any changes. But it would be logical expect companies like Dell and HP to compete extremely aggressively on future contract wins with business customers, especially those, who historically preferred IBM machines.

At the end of the day, Lenovo will not only have to offer competitive pricing and avoid any issues with re-organization of the global PC business, but will also have to prove that the quality of its products is on par compared to what IBM had offered. Hopefully for Lenovo, IBM’s Stephen M. Ward as the CEO of the company will be able to change IBM’s PC unit orientation at corporate customers to Lenovo’s target – the consumers.

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