IBM sells PC group to Lenovo (Chinese)

CNET news ^ | 12/7/04 | John G. Spooner and Michael Kanellos

[Straight Vermonter]

IBM will sell its PC division to China-based Lenovo and take a minority stake in the former rival in a deal valued at $1.75 billion, the companies announced Tuesday.

The two companies announced a plan to form a complex joint venture that would make Lenovo the third-largest PC maker in the world, behind Dell and Hewlett-Packard, but still give IBM a hand in the PC business. The acqusition is expected to be completed in the second quarter of 2005.

Under the deal, IBM will take an 18.9 percent stake in Lenovo. Lenovo will pay $1.25 billion for the IBM PC unit and assume debt, which will bring the total cost to $1.75 billion. Lenovo will pay roughtly $650 million in cash and $600 million in securities. The joint venture is expected to ship around 12 million units based on 2003 numbers and have annual revenue from PC sales of $12 billion.

Lenovo will be the preferred supplier of PCs to IBM and will be allowed to use the IBM brand for five years under an agreement that includes the "Think" brand.

Lenovo is the ninth largest PC maker worldwide, according to the latest market share numbers compiled by Gartner.

The combined venture will have roughly 10,000 IBM employees in its PC group and 9,200 employees at Lenovo.

Executives for both companies trumpeted the importance of the acquisition.

Chuanzhi Liu, current chairman of Lenovo Group, said, "As Lenovo's founder, I am excited by this breakthrough in Lenovo's journey towards becoming an international company."

"Today's announcement further strengthens IBM's ability to capture the highest-value opportunities in a rapidly changing information technology industry," said Sam Palmisano, IBM chairman and chief executive officer.

Stephen Ward, IBM vice president for Personal System Group, will become CEO, while Yang Yuanqing, Lenovo's current CEO, will become president.

One senior IBM executive explained part of Big Blue's motivation for the transaction.

"While we will have less revenue, we will have an improved financial profile," said Mark Loughridge, senior vice president and chief financial officer. It will also allow them to sell more services in China. If it goes through, the deal would allow IBM to continue its shift from selling so-called commodity products toward selling services, software and high-end computers. Although it helped make PCs a global phenomenon, IBM makes little profit from PCs and often loses money, despite the fact that it's an $11 billion business for the company.

During the past several years, IBM has edged out of the commodity hardware business by selling its PC factories in North Carolina to Sanmina-SCI and its hard drive unit to Hitachi. IBM is also likely eying making more inroads into the Chinese market by working with Lenovo to gain an edge in selling servers and services in China, a fast-growing market targeted by a number of U.S. tech giants.

Financial analysts say selling the remainder of the PC business to a joint venture with Lenovo could add more than 5 cents per share to IBM's earnings in 2006, or $85 million in net income.

"We believe a joint-venture structure in PCs makes sense between the companies, as the buyer would collaborate with IBM design teams for a period of a few years and the buyer would assume control of manufacturing," Steven Fortuna, an analyst with Prudential Equity Group, wrote in a report Tuesday.

Meanwhile, it would give Lenovo the opportunity it has always craved to expand beyond China. In 2002, the company began to slightly expand into Spain and regional European markets, but retreated due to market share losses at home.

The big problem, however, is that the deal combines two radically different companies. Lenovo performs very little independent R&D and mostly manufacturers low-end systems. More than half of its sales go to consumers and very few systems get sold outside China, where it has strong ties to the government.

IBM sells to the cream of the corporate crop and often to customers who have invested heavily in IBM services and software. Its flagship ThinkPad notebooks come with novel design features like fingerprint readers for additional data security and hard drives that can survive a 6-foot drop.

Challenges ahead "This is going to be a bigger challenge than both companies think. You are talking about a company (Lenovo) that has no experience internationally. They are very shrewd but they are only used to dealing in the Chinese market," said Joe D'Elia, research director for client computing at iSuppli. "It is going to take quite a long time to consummate, and the only way I see this running properly is that if a lot of blood is shed at IBM PC."

The deal also won't just require getting IBM and Lenovo getting along together. Sanmina-SCI owns the factories where IBM PCs for North America are produced and its contract to make those PCs is up for renewal next year. Because Lenovo does not have the factory capacity in place, the joint venture will have to negotiate a new relationship with Sanmina.

In China, IBM manufactures ThinkPad notebook models in a joint venture with Lenovo arch-rival Great Wall Technology.

Maintaining good relations with IBM's customers will be another concern for the PC group's new owner.

One IBM customer said that as long as products such as the ThinkPad follow familiar paths, he will stay happy.

"We tend to base our decisions on quality control, features and functionality," said Shawn Nunley, director of technology development for NetScaler, in San Jose, Calif. "So if it's the same product, where it's coming from probably won't make a huge difference. However, if they go the commoditization route...and it's no longer the ThinkPad way, then it might change my view."

Nunley said he appreciates the work that IBM has done to integrate security features into its latest ThinkPads.

For Steve Evans, vice president of information systems for the PGA Tour, sticking with IBM will depend on the details of the transaction and how much of the new company would be concentrated nearby. The PGA buys ThinkPads, servers and other IBM hardware.

"We would need to figure out what the presence this company is going to have in the U.S.," Evans said, adding that "It would also kind of depend on what the product lineup looked like.

Lenovo who? Lenovo, formerly known as Legend, is the largest PC maker in China and was founded in 1984 as a distributor of IT products. Over the years it started its own PC business, growing into the No. 1 spot in China. It also sells products ranging from cellular phones to supercomputers.

During 2002, it ramped up plans to sell PCs globally. It even opened a Silicon Valley office and started selling laptops in Spain under its QDI brand. But it's been beaten back by competition from multinational PC makers, such as Dell, which have been growing rapidly in China. Dell, for instance, won a $10 million contract with Beijing's municipal government to supply Optiplex to primary and middle schools in November.

Lenovo said it has responded to "irrational price competition among second-tier PC vendors and increased effort of foreign brands" with price cuts of its own.

Despite the concerns of customers, industry analysts have said it could be a wise move for IBM to get out of building PCs. The timing could be favorable: Although 2005 is expected to be a relatively good year for the PC industry, those good returns will give way to several years of slower sales of PC hardware, analysts have predicted.

By the end of 2005, many businesses and consumers will have replaced their oldest computers, completing the latest PC replacement cycle, Gartner predicted in a report last week. Given that owners typically replace desktops every four years and notebooks every three years, there is likely to be a drop in demand between 2006 and 2008. That period will see average annual unit shipments slow to 5.7 percent and revenue growth subside to 2 percent, Gartner predicted.

So-called emerging markets such as China are expected to see the best growth during that time, a boon for a potential IBM-Lenovo joint venture. But that would be offset by slack demand elsewhere, the Gartner report added, leading to further consolidation if PC makers don't prepare now by lowering their costs.

Still, potential rivals are already throwing cold water on the deal.

"We're not a big fan of the idea of taking companies and smashing them together. When was the last time you saw a successful acquisition or merger in the computer industry?" said Michael Dell, chairman of Dell, during a question-and-answer session at Oracle Open World. "It hasn't happened in a long, long time...I don't see this one (IBM-Lenovo) as being all that different."

[Mears]

Time to get your kids and grandkids fluent in Chinese so they can be ready to emigrate in a few years ----that's where all the jobs will be.

[Echo Talon]

This has been posted about 10 times already... i think Bill Gates should have bought the stock, and if not him Wallmart should have...

[Huber]

Ping!

[Straight Vermonter]

Well if the search feature were working I would have caught that it had been posted already.

[BlackJack]

IBM is getting into WIMAX (business services)

SUNNYVALE, Calif., Nov. 30 /PRNewswire-FirstCall/ -- Proxim Corporation a global leader in wireless networking equipment for Wi-Fi and broadband wireless networks, today announced that Proxim and IBM Global Services have delivered a broadband wireless solution for the Texas-based Canyon Independent School District (CISD), a 15-campus educational organization dedicated to excellence in K through 12 schooling.

[Jack Black]

When was the last time you saw a successful acquisition or merger in the computer industry?"In software constantly. In hardware: Compaq buying Tandem, HP buying Compaq, Seagate going private. On the not successful side IBM buying Sequent and Compaq buying DEC were both disasters.

[stainlessbanner]

When was the last time you saw a successful acquisition or merger in the computer industry?"

MD is right....

DEC + Compaq
Oracle + Peoplesoft
AOL + Time Warner
Cingular + ATTWireless
Ebay + Paypal
Quantum + Maxtor
McDonnell Douglas + Boeing

[Terpfen]

HP's merger with Compaq did NOT work, and Seagate is still a pretty unreliable company, IMO. I don't know about Compaq and Tandem.

[TaxRelief]

What is the deal with the search function, anyway?

[TheBattman]

Oh great - so now all that protected "non-exportable" technology is now exportable because it will now be owned by a Chinese company....

I am truly surprised and disappointed that another US company didn't buy up IBM's PC division.

[Nick Danger]

Sell your Intel stock.

The comments about product cycles are correct and will hurt Intel in the short run... next 3-4 years. But what this deal is really about is making Power PC the standard engine in China.

You watch: before people notice, this little outfit in China will have sold 10 million Power PC boxes running linux. All inside China.

As the PC revolution comes to China, IBM is making a move to grab the microprocessor crown from Intel, and punch Gates' lights out while they're at it. This is some serious strategic thinking on IBM's part... they are playing this for a ten to fifteen year payback. If they pull it off, though, they will own the computer business the way they did in the 1970's.

People have been so busy watching the Intel/AMD rivalry that they haven't paid attention as IBM quietly makes these off-the-radar plays for very-high-volume Power PC wins. The Sony Playstation was one... they'll sell tens of millions of those boxes worldwide, and this is another one.

The Chinese government does not trust Windows. The way to kill it in China is to flood the place with homegrown non-Intel boxes. That way, not even pirate copies of Windows are competitive.

After IBM has sold their first half-billion Power PC linux boxes in China, they'll be Wintel's worst nightmare.

It's games like this that make product strategy fun.

[Cobra64]

IBM's PC division was doomed to fail back in the early 1990s. I predicted that with their Directors back then. Further, six months later, they reported a $60,000,000 write off on their returns. I warned them. Their haughty attitude was, "well it's a small part of the business."

They never learned how to market and manage that arm of their business. Really pathetic. I could write a book in terms of the irreponsible business initiatives and operations in the IBM PC world, both in RTP in Raleigh, NC; as well as in their Westchester, NY Latin America PC operations. Spent two years on these assignments. IBM does not know how to run this type of business. It is their inherent attitude which predludes creative thing, accountability and responsibility.

[ikka]

And 10,000 IBM employees are now... employees of some Chinese company which will simply refuse to pay off on the pension fund benefits.

[PokeyJoe]

Irony

Dell's sales and support system runs on Tandem to this day.

VPAC

[baseball_fan]

along those lines: http://www.freerepublic.com/focus/f-news/1296715/posts

[Hop A Long Cassidy]

>>>"And 10,000 IBM employees are now... employees of some Chinese company which will simply refuse to pay off on the pension fund benefits."

Sounds like a plan for General Motors.

Hoppy

[Straight Vermonter]

You are right. We just shipped our 1 millionth powerpc "Altair" chip to Apple. That is nothing compared to Intel's numbers but it demonstrates the product as being viable (superior?)in desktops.

[Straight Vermonter]

A little more info on IBM's new offering for Apple:

Antares will boast a number of other design strides over the "Altair" 970FX chip. One area will be power management; the 970MP will feature enhancements to IBM's PowerTune technology -- first introduced in the 970FX -- which conserves power by throttling its clock speed on a dime. Both cores will throttle clock speeds and voltage up or down in tandem, sources said.

Antares will be manufactured using IBM's CMOS SOI10K process with Silicon on Insulator technology, sources said. The new chip will also support the VMX instruction set with Altivec-compatible Vector/SIMD units -- one on each core.

Antares will also feature a programmable ABIST diagnostic -- "array built-in self-test" -- that's designed with the Silicon on Insulator arrays in mind.

Sources confirmed that Apple is signed up to use the 970MP in future hardware products, presumably the Power Mac and Xserve product lines. According to sources, IBM designed the 970MP for use in a variety of configurations, including desktops, workstations, servers, and four-way SMP environments.

[Howlin]

Well if the search feature were working I would have caught that it had been posted already.

What do you mean, if it was working?

IBM sells PC group to Lenovo (Chinese)
	Posted by Straight Vermonter On News/Activism 12/07/2004 11:28:04 PM EST · 18 replies · 281+ views CNET news ^ | 12/7/04 | John G. Spooner and Michael Kanellos
IBM sells PC business for $1.25B
	Posted by ex-snook On News/Activism 12/07/2004 9:39:06 PM EST · 7 replies · 256+ views CNN ^ | 12-7-04 | CNN
IBM Sells PC Unit to China's Lenovo [$1.25 billion deal]
	Posted by yonif On News/Activism 12/07/2004 9:13:38 PM EST · 35 replies · 430+ views Reuters ^ | Dec 7, 2004

[Straight Vermonter]

Nothing matched your criteria.

Click to search older articles ...

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[First_Salute]

Power PC bump.

[Howlin]

You do know it doesn't search on three letter words, right?

All I put in was "IBM sells" and got those. There are probably more than that that I just don't know the correct title of.

[Straight Vermonter]

Well that would be the problem then. Thanks.

[Howlin]

You can't believe how long it took me to figure that out.......LOL.

[Straight Vermonter]

Now that I look at the search page it is right there at the very bottom, doh!

[Howlin]

Well, duh on me, too. I never saw THAT before.......LOL.

[Beckwith]

The Chinese are primarily after the patents. Any other assets are just gravy.

[Nick Danger]

What patents are those? The basic Wintel PC design is so open that everybody and his brother makes them.

[Nick Danger]

So when do we see the Sun design win? And how long after that we do we get the Apple/Sun merger?

Some things just make so much sense that they have to happen. The death of SPARC is one, and the formation of another desktop-to-mainframe computer vendor is another.

[First_Salute]

You have probably hit the nail on the head.

[First_Salute]

May interest:

www.pacificepoch.com

[Jack Black]

Why do you say HP / Compaq didn't work? HP stock price is at 20, HP market share for PCs is up. The stock is paying a dividend. What is not working? HP seems a more formidible company post acquisition then before.

[Terpfen]

HP and Compaq haven't meshed. There are a lot of organizational problems, though they're starting to climb out. The stock price is up in spite of the problems, IMO.

[Golden Eagle]

You watch: before people notice, this little outfit in China will have sold 10 million Power PC boxes running linux.

Which completely sucks for everyone except IBM and the Chinese.

And IBM doesn't give a damn, either, they're obviously willing to partner up with the Chicom government (who owns Legend) just to damage other US companies like Microsoft, Sun, HP, Dell, and even Apple.

Your theory doesn't help IBM do anything but sell more a few more of their proprietary processors, who the Chinese won't be needing forever anyway. It doesn't really help IBM at all, it just damages everyone else.

I don't have time to post more on this, my house suffered major hurricane damage this summer and is still under repair, I had to pull the paint protecting plastic sheet off the CPU just to send this. Maybe one of these days I'll have time to time to further elaborate, but this is nothting I haven't predicted all along anyway. Out.

[Nick Danger]

Eagle, I once met a salesman for the Glad Bag company. He calls on industrial outfits, retail chains, etc., that buy plastic bags by the millions. They make a fortune on that stuff.

He said that to even be in the business at all, you had to have truly massive volumes to get the cost down. He said they sell consumers those bags at grocery stores basically for cost. That's just to drive the volume. They make all their money on their industrial clients.

Sound like any computer companies we know?

[Golden Eagle]

You can try to rationalize it all you want, but it's pretty obvious that IBM's fat cats are much more interested in getting fatter than they care about protecting the US technological advantage.

First they undermine the highest per dollar software product we as Americans had, Unix, by pumping up this foreign clone "Linux". Now they're handing some of the most advanced personal compouter designs and hardware manufacturing processes straight over to the Chicom government.

the deal adds new legitimacy to China's global ambitions..Why should a Lenovo be dependent on foreign technology when it can own it?

Three cheers for IBM.

This acquisition will allow Chinese industry to make significant inroads on its path to globalization

What the chinaman did not point out in his statement is his version of "globalization" is a lot different than what you think it is.

IBM tries to tell us PC's aren't important. Well according this report that just came out after the announcement, the market is growing by 10% over it's current record levels as we speak:

Lenovo gains the global reach and scale to compete internationally while strengthening its position in relatively high growth commercial and portable markets.

Three more cheers for IBM.

Not to mention, the defense of the United States could be in peril by fortifying the technological base of our potential adversaries:

The performance limits for exported computers, measured in millions of theoretical calculations per second, or MTOPS, have increased almost annually. Eight times in the last two decades, computer companies have won a relaxation in the Department of Commerce's export limit, which began at less than 160 MTOPS in the mid-1980s and has risen to more than 190,000 MTOPS today. That's far more lenient than the 1,500 MTOPS the Department of Defense has deemed threatening to the United States' military superiority, according to the Defense Department's Militarily Critical Technologies List.

This kind of information is everywhere, that is unless you're out there trying to convince us how good it all is for us. It's nothing new to FR either, although most of us used to be more in agreement. It's also funny how everytime I link one of these old stories it suddenly disappears.

Go ahead with your normal apologies for IBM. It's too bad no one in your family will be losing their job because of this, or not be getting their pension while IBM takes they red china money and spends it on something else. Like more new factories in China.