IBM will take an 18.9% stake in Beijing-based Lenovo under the terms of the agreement, which also sees Lenovo become the preferred supplier of PCs to IBM, and IBM becoming the preferred services and customer-financing provider to Lenovo.
The deal is expected to close in the second quarter of 2005 and will boost Lenovo’s annual revenue to about $12 billion and PC unit shipments to 11.9 million, based on figures from 2003, vaulting Lenovo into third place in the worldwide PC vendor rankings, in place of IBM.
IBM will receive $650 million in cash, while Lenovo will assume about $500 million of net balance sheet liabilities from IBM, which is expecting to recognize a pre-tax gain on the completion of the deal of between $900 million and $1.2 billion. IBM will also receive $600 million in Lenovo common stock, which is subject to a lock-up period expiring periodically over three years.
The deal also sees a change of management and geographic focus for Lenovo, with Stephen Ward, the current senior vice president and general manager of IBM’s personal systems group becoming CEO of the new company, and Lenovo moving its worldwide headquarters to New York.
Lenovo’s vice chairman, president, and CEO, Yuanqing Yang, will become chairman of combined operation. Commenting on the deal, Yang said Lenovo would benefit from the global band recognition, an international customer base, and more diversified product offerings.
Under the terms of the deal, Lenovo has acquired the right to IBM’s ThinkPad brand and can use IBM’s logo as the primary brand for five years before moving to an IBM-endorsed Lenovo brand.
As well as the new worldwide headquarters in New York, Lenovo will also boast principal operations in Beijing and Raleigh, North Carolina, and will take on approximately 10,000 IBM employees, 40% of who are already in China, with 25% in the US. The combined operation will have 19,000 employees.
The deal includes the PC manufacturing portion of IBM’s International Information Products Co Ltd joint venture with Chinese PC assembler Great Wall Technology Co Ltd, although not the eServer xSeries manufacturing portion of that venture.
IBM’s chairman and CEO, Sam Palmisano, said the deal would strengthen IBM’s focus on the enterprise while creating a global business that is better positioned to capture the opportunities in the PC industry going forward.
The structure of the deal certainly appears to benefit IBM, with an 18.9% equity stake in Lenovo, a percentage of Lenovo’s sale to compensate lead generation, a full range of personal computing products to recommend via Lenovo, and the higher margin Global Services and Global Financing business to come from Lenovo customers.
IBM is also selling services to Lenovo to help it with the transition to becoming a global PC player and will receive a fee from Lenovo to provide warranty support for Lenovo PCs.
This transaction is consistent with IBM’s strategy to focus on high value segments of enterprise computing, providing technology and transformation services to improve clients’ business, said Mark Loughridge, IBM’s CFO.
It is a logical extension of actions we have taken over recent years, remixing our portfolio by strengthening IBM’s position in high volume segments such as services and software, he said. This agreement therefore continues IBM’s strategic rebalancing of our portfolio on the high value enterprise market segment.
Loughridge denied that the agreement signaled IBM’s exit of the consumer market, and hinted at the potential for IBM to continue to address personal computing requirements with its Power processors.
We are not exiting. We address this market in ways which best leverage our strengths. First, IBM provides the back-end hardware, software, and services infrastructure required to interface the proliferation of devices, he said. Second, we address this market at the component level. We are seeing a convergence of devices in the home which we believe will be at the component level, and our Power architecture is the key player in this space.
