Lenovo steps up to buy IBM's PC division
IBM agreed this week to sell its PC business to Chinese computer company Lenovo, formerly known as Legend. Lenovo is the dominant PC maker in China, and the IBM deal extends its reach globally. The company will be the #3 PC seller worldwide, after Dell and Hewlett-Packard. The deal is valued at around $1.2 billion.
Lenovo will be able to use the IBM brand -or five years, and will get service and financing support from the company. The US PC business will use the same management team and be run as a separate entity under the Lenovo umbrella. IBM will retain a 19% stake in Lenovo.
IBM was the main originator of the 24-years old personal computer market. But IBM, with only a 5% market share, had long been pushed to the margins of this intensely competitive business, and its profits were relatively small as well. IBM will concentrate on the more general information services market, where it is still #1.
In fact, much of the current IBM manufacturing operations (and 40% of its employees) is currently in East Asia, as are the operations of its main rivals.
But this move betokened what might be a major reversal. Up until now,, Western firms have dealt with China in one of three ways: 1) running manufacturing operations in China to lower costs; 20 bought out Chinese companies when they have come up for sale; 3) or tried to enter the Chinese market with their own brands. Now we will see more and more Chinese manufacturers buying US marketing operations and brands to front their operations in North America and in Europe.
This is truly a watershed deal. As the Financial Times noted ( "Lenovo deal may herald dawn of Chinese M&A era", 12/8/04 ),
The Beijing-based group has become the first state-controlled Chinese company to acquire an iconic global brand, together with the high profile and psychological leap of faith such a deal entails.
The article notes the defensive nature of the move:
The Chinese company clinched the deal because it needed to enter the global big league and cushion the blow of growing competition in its home market - a common reason for M&A activity in the rest of the world.
In other words, it wanted to protect its turf against the ambitions of Dell, HP, Toshiba, and others. The best defense is growing.
Although the new company will be bigger, Lenovo will still be a distinct #3, with only 9% of the world market It will interesting to see if the company can come up with a lower cost through better supply-chain management and a better marketing campaign to challenge the big two. And even one of those competitorsmay be having cold feet. HP, which has lost market share to Dell and sees its profits dwindling as IBM did, admitted this week that it had considered spinning off its PC business from its far more profitable printer and IT services businesses.
