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IBM deal: A bridge between companies and cultures

The IBM's sale of PC unit to Lenovo points to the rising global aspirations of corporate China as it strives to become a trusted supplier to Western companies and consumers.

IBM ANNOUNCED early last week the sale of its personal computer business to Lenovo, China's largest personal computer maker, a deal that reflects the industrial and economic ambitions of not only the two companies but also their two nations.

Under Lenovo's ownership, the IBM personal computer business will continue to be based in the U.S. and run by its current management team. IBM will take a stake of 18.9 per cent in Lenovo, which is based in Beijing, but now plans to have headquarters in New York.

The significance of the deal may exceed the relatively modest amount that Lenovo is paying: a total of $1.75 billion in cash, stock and debt.

The merger creates a third largest PC business in the world with about $12 billion (Euro 9 billion) in 2003 revenue and an 8 per cent market share.

The transaction points to the rising global aspirations of corporate China as it strives to become a trusted supplier to Western companies and consumers.

The sale also signals a recognition by IBM, the prototypical American multinational, that its own future lies even farther up the economic ladder in technology services and consulting, in software and in the larger computers that power corporate networks and the Internet.

All of those are businesses far more profitable for IBM than its personal computer unit.

But the move signals an acknowledgment by IBM that its future in China may be best served by a close partnership with a local market leader — particularly one, as in Lenovo's case, that is partly owned by the Chinese government. The chief executive of Lenovo will be Stephen M. Ward Jr., now an IBM senior vice president in charge of the PC business. Lenovo's current chief and president, Yang Yuanqing, will become Lenovo's chairman.

Potential market

American companies, in one industry after another, are scrambling to take advantage of the vast potential of the Chinese market. Chinese companies like Lenovo, meanwhile, are increasingly seeking to tap into overseas markets, management expertise and technological skill.

"This is an encouraging sign of the increasingly sophisticated trans-Pacific ties between the U.S. and China,'' said Timothy F. Bresnahan, an economist at Stanford University. "Seeing the Chinese seeking these kinds of economic links can only be a good thing.''

The complex transaction is meant to serve as a bridge between different companies from different cultures, by seeking to ensure that IBM has a stake in the Chinese company's success.

Whether in the U.S., in China or anywhere else in the world, such a stake will be in IBM's self-interest; a messy exit from the personal computer industry can rankle corporate customers, hurting IBM's other businesses, and tarnish its stellar brand name.

IBM has agreed to hold onto its stake in Lenovo for three years, the companies said, with an option of extending it. Its financial commitment to Lenovo could help open doors for its efforts to win other business in China.

The senior management of the current personal computer business will join the Chinese company, led by Ward and Fran O'Sullivan, the general manager of IBM's personal computer division.

Besides management expertise, Lenovo will be acquiring five-year brand-licensing rights to a computer business best known for its IBM Thinkpad notebooks, its sleek black desktops and the product line's distinctive tricolour IBM logo.

While Lenovo will have its headquarters in New York, the hub of the IBM PC business is in Raleigh, North Corolina, where its design and development operations are based. IBM employs about 10,000 people worldwide in its PC business, although fewer than a quarter of those workers are in the United States. In fact, 40 per cent are already working in China.

Under the agreement, IBM will continue to handle technical support, financing and warranty coverage globally for its former personal computer division. Those tend to be steady and profitable cash-generating businesses, even as the PC business itself has been only intermittently profitable for IBM lately.

It was IBM that moved the personal computer industry from a hobbyist market into the corporate and consumer mainstream, with its first PC in 1981. But as the company lost its PC market leadership to nimbler players, the company has pulled back its commitment to the business in recent years, first by getting out of retail sales and, in 2002, passing off its desktop PC manufacturing to a Silicon Valley contractor, Sanmina-SCI.

Today, IBM is a distant third in worldwide PC market share, behind Dell and Hewlett-Packard. IBM's personal computer sales are about $10 billion a year, or about 11 per cent of its $89 billion in revenue, but it has hovered between slight profits and losses in recent years. In its hasty entry into the PC business in the early 1980s, IBM made what turned out to be a strategic mistake: It chose outside suppliers for the crucial technologies of the microprocessor and the software operating system, helping Intel and Microsoft become two of the most profitable companies in the world.

For nearly a decade, executives have debated dropping out of the personal computer business.

Samuel J. Palmisano, who became IBM's chief executive in 2002, finally made the move. He decided that the company's management and investment resources would be better used in its other businesses like software and services to help customers use information technology to help automate business tasks from product design to procurement.

"The PC business is just not that important anymore to IBM strategically,'' said A.M. Sacconaghi, an analyst at Sanford C. Bernstein & Co. "Mr. Palmisano has decided to focus instead on businesses that are more profitable for IBM and promise higher growth.''

In a statement, Mr. Palmisano said the PC industry "continues to take on the characteristics of the home and consumer electronics industry which favours enormous economies of scale and a focus on individual users and buyers,'' while IBM will focus more on the corporate market.

Worldwide PC sales

Still, industry analysts say, it is not clear that a business that was struggling under IBM will thrive under Lenovo. Worldwide growth in PC sales, according to Gartner, a research firm, will slow to about 2 per cent a year from 2006 to 2008, less than half the projected revenue gains of 4.7 per cent a year from 2003 to 2005.

The number of PC makers, analysts say, will probably be winnowed in the next few years.

"Lenovo aspires to become a major international player and a recognised brand, a company with the ability to sell into multinational corporations and be profitable,'' said Leslie Fiering, an analyst for Gartner. "This deal improves its chances, but the business is only going to get tougher over the next few years.''

The personal computer industry, like most technology businesses, is not one in which low labour costs — one of China's advantages in competing with Western rivals — are much of an edge.

The big winner in the business, Dell Inc., is mainly a master of ultra-efficient management of its suppliers, assembly and distribution.

IBM's rivals said the Lenovo purchase would create uncertainty among customers and provide opportunity for them. "It's hard to think back on a successful large merger in the computer industry, and I don't see this one being different,'' Michael S. Dell, chairman of Dell, said Tuesday. "We like to acquire our competitors one customer at a time.''

Steve Lohr & Andrew Ross Sorkin

New York Times News Service

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