Update: Lenovo to buy IBM's PC business

China's Lenovo Group has signed a definitive agreement to acquire IBM's personal computing division. Lenovo will pay $US1.25 billion (AUD$1.6 billion) in cash for the business, which is expected to transform it into the world's number three PC maker, the companies announced.

In addition to money, IBM will also take a 18.9 per cent stake in Lenovo. The cash and equity combined brings the total value of the deal to about $US1.75 billion. It is expected to be completed in the second quarter of 2005.

A deal between the two companies comes as no surprise. It's been the talk of the PC industry since last week, when reports of IBM's plans to sell its PC business appeared in The New York Times. However, few details were known about the nature of the deal and its possible affect on IBM's existing PC customers until the announcement on Wednesday.

IBM and Lenovo said customers would see no change in product availability and support, either while the deal was being completed or afterward, while the PC operations of the two companies were integrated.

In Australia and New Zealand, IBM's Personal Computing Division will also continue to run the business as usual, the company said. Beyond the integration however, the impact is of the deal is less clear.

Following the deal, the two companies would enter an alliance under which IBM became the preferred services and customer financing provider to Lenovo, and Lenovo became the preferred supplier of PCs to IBM, they said.

"Lenovo products will be co-branded for the next few years, to leverage the power of the IBM ThinkPad brand with our existing and future customers," chief financial officer of IBM, Mark Loughridge, said.

"We will have a phased implementation with products initially using the IBM logo as the primary brand and transitioning over 60 months to an IBM endorsement of the Lenovo-branded products."

Leasing, financing, warranty and maintenance services would be provided by IBM Global Financing and IBM Global Services to Lenovo customers, he said.

IBM was getting out of the PC manufacturing business because it saw greater profits in the services market, Loughridge said.

"Our strategy is clear, to be the world-leader in high-value solutions," he said.

"[The deal] helps IBM focus on enterprise and small and medium-size business [SMB] segments where we can best leverage our value-add."

Since 2002, IBM has spent about $US9 billion to acquire more than 30 companies including Price Waterhouse Coopers Consulting. In the same period, it has divested several businesses where it lacks scale or market opportunities, such as its hard-disk drives and displays units.

"The PC business is rapidly taking on the characteristic of the home and consumer industry, which favors enormous economies of scale focused on individual users and buyers," Loughridge said.. "This agreement continues IBM's strategic rebalancing of our portfolio on the high-value enterprise market."

The headquarters of Lenovo's new PC business will be in New York and it will have major operations in Raleigh, North Carolina, in the USand in Beijing.

Stephen Ward, currently the senior vice-president and general manager of IBM's personal systems group, will become chief executive officer of Lenovo.

Yuanqing Yang, currently vice-chairman, president and CEO of Lenovo, will become chairman of Lenovo once the deal is completed.

Locally, Alan Munro, general manager of IBM's Personal Computing Division in Australia and New Zealand, will lead Lenovo's ANZ operations once the deal is finalised.

"We're planning for a smooth transition, with uninterrupted service for our customers," he said.

Lenovo will have about 19,000 employees following the acquisition. Of these, about 10,000 are current IBM employees, of which about 4000 are based in China. The vendor is expected to take on up to 180 IBM employees in Australia and 10 in New Zealand on completion of the deal, according to Munro.

The deal requires the approval of Lenovo shareholders and relevant regulatory authorities.

Lenovo Holdings, Lenovo Group's largest shareholder, has already agreed to vote in favor of the transaction.

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