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Big Blue waves bye-bye to PCs
8 December, 2004
by Chris Talbot
IBM and Beijing, China-based Lenovo Group have struck a deal
that will see Lenovo acquire IBM's personal computing division,
thereby turning the number one Chinese PC vendor into the
third largest worldwide PC vendor.
The acquisition is expected to be completed during the second
quarter of 2005, and the new business will be headquarted
in New York with U.S.-based management, said Mark Loughridge,
senior vice president and CFO at IBM. Based on 2003 revenue
statistics, the acquisition would turn Lenovo into a $12 billion
(U.S.) company.
"Lenovo will be the preferred provider of IBM branded
personal computers to our clients, and IBM will continue to
provide financing and maintainence services for these PC solutions,"
Loughridge said.
The transaction will include $1.25 billion (U.S.) in cash,
but IBM will also take an 18.9 per cent equity in Lenovo.
The total value of the acquisition is valued at $1.75 billion
(U.S.). According to Loughridge, IT companies need to continue
to reinvent themselves to stay competitive, and this deal
with Lenovo will mean IBM will be able to focus on other areas
important to the company's business.
"Over time, this action will imrpove IBM's financial
profile with less revenue volatility and improved profit margins,"
Loughridge said.
According to Leslie Fiering, research vice president for
Gartner's client platforms group, this was a "phenomenal
move" for IBM. The pressure on PC vendors will be building
up over the next few years, and IBM was very proactive.
"They basically structured a deal when the PC business
still had some reasonable valuation to it, and the first to
make a deal of this type gives them the most choices in partners
and what they're going to do," Fiering said. "They
don't have to react. They can be proactive. I think they structured
a tremendous deal."
Managing a PC hardware business today requires the ability
to require at the single-digit margin level, which Lenovo
can do, but large systems companies like IBM cannot do, Fiering
said.
"On the other hand, they retain services, warranty and
immediate contact with their direct customers, so they've
structured the deal to try to make it as transparent as possible
to the customers," Fiering said.
One of the things that is going to happen as there is some
downturn in the industry, Fiering said, is there will be much
more downward pricing pressure on PCs. While that's good news
for the customers, it's at the expense of the stability of
the big players, she said.
"They chose to exit more gracefully than some of their
competitors may," Fiering said.
Don Myles, former general manager of IBM Canada's PC division,
said IBM's exit from the PC market is the same as what the
company did with its printer business 15 years ago. IBM kept
the high-price, high-profit business and sold the low-margin,
commoditized business to what ended up being Lexmark.
"You'll notice they're not getting rid of Intel-based
servers," Myles said at Integrated mar.com's NetProfit
Retreat event. IBM separates its business into high value-add
and low value-add, he added.
IBM's PC employees and assets will become part of a business
that is well- positioned to exploit the PC industry, Loughridge
said. He added that the agreement is consistent with IBM's
strategy to focus on segments of the enterprise and SMB markets
where it can best leverage value-add.
"From a market perspective, the PC business is rapidly
taking on the characteristics of the home and consumer industry,
which favors enormous economies of scale and a focus on individual
users and buyers," Loughridge said.
with files from Rob Dutt.
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