IBM/Lenovo Deal Spawns New PC Giant, Fuels Big Blue's Services Transition

The widely expected deal, one of the biggest Chinese overseas acquisitions ever, would make Lenovo the third-largest PC company in the world. IBM currently holds that spot.

The sale extends IBM's long-running transition from leader and innovator in computer hardware to a dominant force in computer services, software and consulting.

About 9,500 IBM workers will become employees of the new company, doubling Lenovo's workforce.

The stock IBM is receiving will give it an 18.9 percent stake in the merged company, which will have an estimated 8 percent share of the worldwide PC market. The combined PC revenue for the two companies in 2003 was $12 billion.

Like other major Chinese manufacturers hoping to expand overseas, Lenovo is planning to leverage a well-known foreign brand name.

The deal will give Lenovo ownership of two well-respected IBM brands: the ThinkPad laptop name and the ThinkCentre desktop name. Lenovo will be able to continue using the IBM name in front of those two brands for up to five years. The eventual plan is to sell the machines as Lenovo ThinkPads and Lenovo ThinkCentres.

Stephen M. Ward Jr., 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 after the transaction.

IBM executives sought to reassure jittery investors, customers and employees, emphasizing the company's focus on continuity.

"The IBM brand will gain great recognition in China, the world's fastest growing economy and the world's fastest growing market for PCs," said John Joyce, IBM senior vice president and group executive of IBM Global Services.

"For employees, this represents an opportunity to join a vibrant and growing company, and for investors this agreement represents an opportunity to reap the rewards of a growing company in a growing market," he said.

Lenovo is China's biggest computer maker, claiming a 27 percent market share, as well as the biggest in Asia. Its shares are traded in Hong Kong.

The announcement Wednesday followed numerous reports a deal was imminent.

"The bigger the baby, the more difficult the delivery," Lenovo's chairman Liu Chuanzhihe quipped when asked about the delay in making a formal announcement.

With speculation about the impending deal mounting Tuesday, IBM's stock fell $1.57 per share to $96.10 in trading on the New York Stock Exchange. Shares rose 10 cents in after-hours trading, to $96.20.

The companies expect that by combining operations, they'll be able to save money on manufacturing and expand their razor-thin profit margins despite intense pricing pressures. Lenovo also hopes the IBM brand and the company's vast corporate client base will bolster its sagging fortunes.

IBM designs its ThinkPad laptops and ThinkCentre desktops, but no longer manufactures them at any plants it owns alone. Instead, all its PCs are either produced through joint ventures or outsourced to other manufacturers.

Globally, IBM sold 6.8 million PCs in the first nine months of 2004 for a 5 percent market share, research firm Gartner said. That compares with 16.4 percent for Dell. and 13.9 percent for Hewlett-Packard, which makes both the HP and Compaq brands.

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 thanks to aggressive competition from Dell and upstarts such as eMachines, which was acquired earlier this year by Gateway.

Where an entry-level desktop computer once rarely sold for less than a thousand dollars, consumers can now find powerful, name-brand machines with a wide array of the latest bells and whistles for less than $500, including the monitor.

As a result, despite frequent accolades for many of its ThinkPad laptops, IBM has been shifting focus away from the PC business for years, emphasizing more profitable operations such as technology consulting, systems management, software and outsourcing.

Lenovo, founded in 1984 and formerly known as Legend, currently holds a 2 percent share of the PC market, according to Gartner.

But while Lenovo also has moved to lessen its dependence on PC's by expanding into cell phone manufacturing and information technology services, the company had said more recently it wants to focus on its core computer business again.

IBM, based in Armonk, N.Y., has nearly 320,000 employees.

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