IBM, Lenovo Plan Joint PC Venture
Chinese Firm Would Pay
Up to $2 Billion for Stake
In Big Blue’s Business
By WILLIAM M. BULKELEY in Boston and EVAN RAMSTAD and KATE LINEBAUGH in Hong Kong
Staff Reporters of THE WALL STREET JOURNAL
December 7, 2004; Page A3
International Business Machines Corp. and Lenovo Group Ltd. plan to create a new U.S. personal-computer company that would own IBM’s PC business, according to people familiar with the negotiations.
The new company would be majority owned by Lenovo, with IBM holding on to a minority stake small enough that its revenues and profit or loss would be excluded from operating results.
While the deal hasn’t been finalized, Lenovo is expected to pay as much as $2 billion for the majority share of IBM’s PC business, say people involved in the talks. The purchase price is only a fraction of the IBM unit’s estimated $10 billion in annual sales, but by dealing with Lenovo, which has little presence outside China, IBM holds on to the ancillary service and financing business, which can be lucrative.
Both companies will have incentive to make the new company successful. IBM wants to continue to get income from financing and servicing the millions of PCs its salespeople sell to big corporate buyers around the world. Lenovo wants the economies of scale it would get by buying the world’s No. 3 PC maker, and needs the valuable IBM brand and access to IBM’s accounts.
The discussions, which have been rumored for weeks, were confirmed by participants. The deal could be announced as soon as today.
A person familiar with the plan said Lenovo will move the new company’s headquarters to Raleigh, N.C., where the IBM PC unit’s design-and-development activities are based. It is expected that 2,500 IBM employees would join the new company. IBM’s PC headquarters are currently in Somers, N.Y., where many other IBM operations are based. IBM doesn’t make PCs, having outsourced those operations almost three years ago.
Although Lenovo is eager to expand beyond its home base of China, in purchasing IBM’s PC unit it risks taking ownership of a marginally profitable business in a commoditized industry. In a worst-case scenario, IBM customers who are unsettled by dealing with Lenovo could quickly switch to Dell Inc. or Hewlett-Packard Co., the industry’s leaders. “If they immediately change the brand from IBM to Lenovo PCs, there’d be customers running for the hills,” said Martin Gilliland, a Gartner Inc. analyst in Singapore.
As a result, the deal is being structured for IBM to continue providing sales, service and financing support for several years, a person involved in the talks said. Lenovo would use IBM’s name and the ThinkPad brand for the widely admired notebook line.
The structure appears similar to that used for the TV manufacturing operations of France’s Thomson SA, one of the biggest takeovers of a Western company’s operations to date by a Chinese manufacturer. The maker of Thomson and RCA brand TV sets, placed its set-manufacturing operations in a joint venture with China’s TCL Corp. earlier this year. While TCL controls the venture, Thomson continues to provide sales and service to its traditional customers and is positioned to convert its stake in the venture into TCL shares.
Shares in Lenovo were suspended from trading on the Hong Kong Stock Exchange yesterday and are unlikely to trade again until the companies either reach a deal or Lenovo makes a formal announcement to investors. A Lenovo spokesman said yesterday morning that the company was preparing an announcement, but the company ultimately made none. IBM said its policy is not to comment on rumors.
A deal would provide Lenovo with an international presence and size, but it will present the company with many execution challenges and is likely to dilute its profits. With only $400 million in cash, Lenovo would likely issue new stock to help pay for the purchase and the earnings from the IBM PC business wouldn’t be enough to offset the potential dilution, wrote Johnny Chan, a JPMorgan financial analyst in Hong Kong, in a research note.
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