Dec. 8 (Bloomberg) -- Lenovo Group Ltd. agreed to pay $1.25 billion for International Business Machines Corp.'s personal computer business, making the Chinese company the world's third- largest PC maker and giving it a globally recognized brand.
Lenovo will pay $650 million in cash and $600 million in stock, Chief Executive Yang Yuanqing said at a press conference today in Beijing. The company will also assume $500 million of debt. Stephen Ward, head of IBM's PC unit, will become Lenovo's chief executive after the acquisition, which will leave IBM with an 18.9 percent stake in the Hong Kong-listed company.
The purchase vaults Beijing-based Lenovo to third from eighth with about 7 percent of a $183 billion global market dominated by U.S. manufacturers Dell Inc. and Hewlett-Packard Co. Armonk, New York-based IBM is pulling out of a business it helped create two decades ago to concentrate on services.
Lenovo ``has a much more suitable cost base to handle this business'' than IBM, said Tim Leung, who helps manage $370 million in Asian stocks at IG Investment Management (Hong Kong) Ltd. ``This will allow them the opportunity to explore the European and U.S. markets.''
The agreement, which the companies expect to be completed in the second quarter of 2005, is the biggest acquisition of a U.S. company by a mainland Chinese rival, according to data compiled by Bloomberg. The purchase is also symbolic of the shift in technology manufacturing to Asia, home to the world's two largest consumer-electronics makers and top three digital camera makers.
Expansion
The acquisition expands Lenovo's PC business fourfold, giving it annual revenue of about $12 billion and output of 11.9 million units, based on 2003 results, today's statement said. Lenovo will gain rights to use IBM's brand for five years. Lenovo's new PC business will also get a worldwide distribution and sales network covering 160 countries.
Lenovo and IBM would have had a combined 6.7 percent of the global personal computer market in 2003. Bloomberg calculated the figure by adding the 5 percent market share for IBM and 1.7 percent market share for Lenovo based on Gartner research.
The push outside China coincides with tougher price competition and slower growth in Lenovo's home market, where the company has mainly sold its computers. In the Asia Pacific market outside Japan, Lenovo's PC shipments grew 14.6 percent in the third quarter, less than half the 30.9 percent growth at Dell and compared with the 31.5 percent expansion in the region at IBM.
`Fierce Competition'
Lenovo's shares had their biggest one-day drop in more than two years on Nov. 16 after the company reported earnings for its fiscal second quarter that missed some analysts' estimates.
``Lenovo needs to go outside China,'' said Michael Ding, president of Fubon Asset Management Co., which oversees the equivalent of $6.9 billion in equities in Taipei. ``Competition in China is going to become very fierce.''
The Chinese computer maker, formerly known as Legend, will gain use of the world's third-most recognized brand behind Coca- Cola Co. and Microsoft Corp. IBM's brand name is worth $53.8 billion, according to a survey by Interbrand Corp. and JPMorgan Chase & Co. published in BusinessWeek Magazine in August.
Access
The agreement gives Lenovo, which will provide computer equipment and services to the Turin Olympic Winter Games in 2006 and the Beijing Olympic Games in 2008, better access to markets in the U.S. and Europe, brand names such as the ThinkPad, and the ability to drive better prices from component suppliers.
Lenovo's PC business will have its global headquarters in New York, with operations in Beijing and Raleigh, North Carolina, the statement said. Chief Executive Yang will become Lenovo's chairman after the transaction is completed.
``IBM is moving towards a direction to have strategic alliances with companies like Lenovo where IBM's strength in service, financing and end solution for customers can be put together with integrated companies like the Old Lenovo and like the new Lenovo,'' IBM's Ward said today.
Much of the world's supply of computers, mobile phones and digital cameras are now manufactured in Asia because of the region's lower costs. The PC market, in particular, is well-known as a business of low margins and tough price competition.
The PC business at IBM posted a loss of $50 million on sales of $2.84 billion in the third quarter. Computer services generated $11.1 billion in sales and a profit of $1.2 billion.
Margins
``The problem with the PC market is that margins are tight, and PCs are increasingly becoming a commodity,'' said Bryan Ma, an analyst with market researcher IDC Corp. in Singapore.
Slower growth rates and declining margins may force some manufacturers out of the market altogether, with three of the top 10 PC makers withdrawing by 2007, Gartner researcher Leslie Fiering wrote in a report dated Nov. 30.
PC unit growth is forecast to average 5.7 percent annually from 2006 through 2008, half the 11.3 percent average of 2003 through 2005, Gartner said in the same report.
PC revenue growth will average 2 percent annually from 2006 through 2008, less than half the 4.7 percent average of 2003 through 2005. Emerging markets will account for more than 60 percent of PC market growth from 2006 through 2008, Gartner said.
``Dell is about the only company globally that consistently makes a profit in the computer business,'' said Yoshihide Ohtake, a senior analyst at Shinko Securities Co. in Tokyo. ``The rest are all losing money, or finding it hard to eke out two straight years of profit.''
Business Sales
For IBM, the sale fits Chief Executive Sam Palmisano's strategy of relying more on services for growth.
IBM sold its hard-disk drive business in 2002 after the technology behind the products became widely available and easy to copy, leading to a series of price cuts that depressed profit. The same thing has happened in PCs as consumers use new items such as mobile phones to access the Internet, analysts said.
IBM, which made its first PC in 1981 and won orders by catering to businesses, retreated from selling its Aptiva PCs to retailers in the U.S. in 1999 and instead decided to sell over the Internet. It continued to sell ThinkPad notebook PCs to stem losses that grew to almost $1 billion in 1998.
Name Recognition
``It's positive for IBM because they're hiving off a money- losing division,'' said Francis Lun, general manager at Fulbright Securities Ltd. in Hong Kong. ``For Lenovo, earnings will be diluted. The PC business is cutthroat and Lenovo already has problems meeting Dell at home. It's doubtful that they can turn it around with low-cost manufacturing.''
One advantage for Lenovo may be the name recognition and the access to technology that IBM brings, said Masahiko Ishino, a senior analyst at Mitsubishi Securities Co. in Tokyo.
The purchase will give a boost to Lenovo's ``brand at least in China,'' Ishino said. ``Globally, it doesn't have much recognition, but the merit is the company now has access to IBM's superior technology.''
