IBM Discloses Details Of PC Business Sale

It's official: The company that helped start the PC market in the early 1980s is exiting the business. Under a blockbuster deal disclosed late Tuesday, IBM will sell its personal-computing business unit to Chinese manufacturer Lenovo Group Ltd. Under the deal, Lenovo will pay IBM $1.75 billion in cash and stock. About 10,000 IBM employees, most of them already in China, will join Lenovo. The transaction is expected to close in the second quarter of 2005.

Lenovo, which was founded in 1984 and has become a pioneer in the Chinese PC industry, will establish its worldwide headquarters in New York, assume control of IBM's PC operations in Raleigh, N.C., and conduct most of its manufacturing operations in Beijing. IBM will hold an 18.9% equity stake in Lenovo and provide the company with a range of IT services. Lenovo also retains the right to use IBM trademarks, including the widely successful ThinkPad laptop brand, for the next five years.

The move completes IBM's exit from the PC business, which, despite generating some $9 billion in sales in 2003, has in recent years been a drag on the company's earnings and profit margins. Analysts blame cutthroat competition from price-slashing competitors such as Dell and low-cost Asian suppliers, including Lenovo itself. Wall Street shrugged off the announcement in early trading Wednesday, with IBM's share price virtually unchanged at about $96.

Some analysts welcome news of the sale. "This is a great move for IBM in terms of boosting margins and profitability," says Chris Foster, senior analyst at Technology Business Research. The deal should also help IBM grow sales of servers and IT services in China, Foster says. "China can be a very difficult market to penetrate without a strong equity partner."

Others, however, are less than optimistic about the deal. "This is not the high-quality firm buying the low-quality firm, it's the other way around," says PC industry analyst and former IBM employee Rob Enderle of the Enderle Group. As a result, Enderle believes the sale "puts IBM's customers at risk."IBM counters that it will continue to offer PCs to its customers through a marketing alliance with Lenovo. Some IBM customers say maintaining such continuity is crucial. "I'm not so concerned that IBM doesn't make the PCs, as long as they can ease our selection and procurement of the right systems," says Ken Andre, CIO at packaging company Greif Inc. Greif recently placed a major order with IBM for PCs and servers.

IBM officials are now squarely focused on more lucrative opportunities within the IT and business-services markets. The deal "strengthens IBM's ability to capture the highest-value opportunities in a rapidly changing information technology industry," IBM chairman and CEO Sam Palmisano said in a statement. Indeed, the terms of the deal reflect the reason Palmisano believes IBM is better served concentrating on its services unit and expanding its business-process-outsourcing offerings. At $1.75 billion, the sale price underscores the fact that IBM has individual outsourcing contracts that are worth more than its entire PC business.

Additionally, some observers say the sale is a less-drastic step for IBM than headlines would suggest. The company has a history of selling off commodity hardware lines threatened by margin erosion. It recently sold its hard-drive business to Hitachi and previously spun off its printer division to create Lexmark International Inc. Widely recognized as one of the leading pioneers in launching the desktop PC business (see our time line on IBM's PC business), IBM had nonetheless exited the consumer PC market in the late '90s and had previously outsourced most manufacturing of business computers.

This story was updated on Dec. 13.