IBM-Lenovo Pact On Tap To Be Announced Tuesday

Trading in shares of Lenovo, China's largest computer company, were suspended Monday, a sign some sources said is a sign that the deal is finalized and ready to be announced.

"This is a huge deal," said John Marks, CEO of JDM Infrastructure, a Rosemont, Ill.-based reseller that does millions of dollars a year in IBM business. "Short term it's going to be bad for resellers that have IBM deals on the table that they are trying to close by the end of the year. I have a deal right now for 250 IBM desktops that is on hold because of this. That account is now looking at Dell."

Barring any last-minute hiccup, IBM is expected to announce an agreement in principle to sell its PC business, including the desktop and notebook business, to Lenovo, sources said. If the deal is consummated after a due diligence phase, which could take four months, Lenovo will end up manufacturing and marketing IBM-branded PCs and notebooks through the current IBM channels including the IBM direct sales force, sources said. The pact does not include IBM servers. IBM and LeNovo were unavailable for comment Monday.

The deal marks the end of an era for IBM, which entered the PC market more than 20 years ago. It also marks another sign that IBM Chairman and Chief Executive Sam Palmisano is sharply focusing the computer giant on providing consulting and services in specific vertical industries, industry executives said.

A mid-market focused solution provider, who did not want to be identified, is consistent with Palmisano's drive to move the company out of commodity products. This is all part of IBM's move to services, taking the "high road" in corporate enterprises, the VAR said.

The sale will effectively transfer the majority of IBM PC Division employees into Lenovo, sources said. Sources said Stephen Ward Jr., the current senior vice president and general manager of IBM's Personal Systems Group, is expected to head the new Lenovo unit.

"Steve is a great guy. He knows the business. And he's very channel friendly," said a channel source who did not want to be named. IBM has shopped its PC business around to a number of companies in the last few months, said the source. "It looks to me like they found somebody who is willing to bite on this one," said the source. "IBM over the last couple of years, has tried to find ways to take cost out of the business."

The IBM Personal Systems Group has been profitable for the past several quarters, but reported a loss of $118 million in 2003 from continuing operations on sales of $11.5 billion. "It's not a lot [of a loss] but it's still a loss-leader business for them," said one source.

IBM retaining a minority interest is not likely to be enough to stop buyers from considering new alternatives in the wake of the IBM-Lenovo deal, Marks said. That said, he expects in the long run the IBM brand will increase as a result of the sale to Lenovo.

"Some of the market share they have lost over the years because of their high price might come back especially since Dell is not performing," Marks said. "Companies are not raving over Dell's customer service. They like the Dell price."

One big question is who is going to be in charge of the channel for Lenovo in the United States and "how quickly are the IBM people who support us today going to know their fate," Marks said. "It is critical that Lenovo have a seasoned channel executive calling the shots in the United States," he said.

Solution providers said with a strong, seasoned channel executive and a channel friendly effort Lenovo, a low-cost manufacturer that has done contract manufacturing for IBM, could provide a lower-priced alternative to Dell and Hewlett-Packard. On the other hand, if Lenovo bumbles the channel effort or mounts an aggressive direct offensive, it could mean fewer options for partners that have been selling IBM systems as a strong value alternative, they said.

The news could have particularly thorny implications for Ingram Micro's VentureTech network members that have embraced the IBM product line in recent years. IBM has boasted that its market share of PCs, notebooks and servers among VentureTech members has increased to 59 percent from 22 percent two years ago.

John DeRocker, a VentureTech board member and the senior vice president of sales and marketing for Nexus Information Systems, a Plymouth, Minn.-based solution provider, said if the sales goes through without heavy IBM involvement it could be a big "mess" for VentureTech members and other IBM longtime partners.

Lenovo, formerly known as Hong Kong Legend, was established and began distributing computers including IBM systems and HP printers and peripherals 20 years ago. In recent years, Lenovo has done contract manufacturing for IBM.

CRAIG ZARLEY AND BARBARA DARROW CONTRIBUTED TO THIS ARTICLE.