Lenovo To Acquire IBM PC Division

IBM has reached a definitive agreement to sell its PC division to China-based computer vendor Lenovo Group in a deal that will effectively create a $12 billion PC company that will compete against Hewlett-Packard and Dell.

Under the deal, announced Tuesday night, IBM will receive at least $650 million in cash and up to $600 million in Lenovo Group common stock, subject to a lockup period expiring periodically over three years. Additionally, Lenovo will assume approximately $500 million of net balance sheet liabilities from IBM. IBM will take an 18.9 percent stake in Lenovo.

Stephen M. Ward Jr., currently IBM senior vice president and general manager of IBM's Personal Systems Group, will serve as the CEO of Lenovo following completion of the deal, which is expected to close in the second quarter of 2005.

IBM-branded PCs and ThinkPads will be continue to be sold through existing IBM channels, including about 7,000 IBM PC business partners in the United States.

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Solution providers should maintain the same account reps under Lenovo that they had with IBM, according to a source close to IBM. In addition, the new Lenovo will be part of the IBM PartnerWorld program, and solution providers will continue to receive marketing and sales resources, training, certification and technical support, according to a letter sent to some IBM solution providers Tuesday night.

Some solution providers expressed concern about how IBM's selloff of its PC unit will impact their businesses.

"This doesn't ease any of my fears and, more importantly, I don't think it is going to ease any of the customer fears," said John Marks, CEO of JDM Infrastructure, a Rosemont, Ill.-based reseller that does millions of dollars in business with IBM. "People are going to take a wait-and-see attitude on what kind of impact this has. The key is whether they turn over accounts to the channel. They have to come out as a strong channel advocate and turn over accounts that have been buying direct with IBM and with IBM Global Services. Then I will know they are serious about the channel and the channel business."

Other solution providers are hopeful that Lenovo's manufacturing capabilities will lead to lower prices or higher profits, which would allow them to be more competitive against Dell.

"I am looking for that kind of impact on the market," said Laurie Benson, president of Inacom Information Systems, a solution provider in Madison, Wisc., whose IBM business grew 150 percent this year. "I understand the profitability model [IBM is faced with], and I absolutely trust them to take into account the best interests of their customers and their business partners."

But Geoffrey Lilien, CEO of Lilien Systems, an HP solution provider in Mill Valley, Calif., expects that Dell and HP will be quick to sow doubt in customers' minds. "They should be able to FUD out the Chinese," he said.

IBM will provide marketing support and demand-generation services for Lenovo products through IBM's existing enterprise sales force of some 30,000 professionals, as well as through IBM.com. Lenovo products will also be sold through IBM PC specialists that will join Lenovo, according to IBM. IBM Global Financing and IBM Global Services will be preferred providers to Lenovo for leasing and financing services and for warranty and maintenance services, respectively.

IBM will receive sales fees from Lenovo, said Mark Loughridge, senior vice president and CFO of IBM, during a conference call. Lenovo will continue to use the IBM brand for up to five years, he said.

"It will be co-branded for the next few years to leverage the IBM ThinkPad brand. It will be a phased implementation with products initially using the IBM brand," Loughridge said.

The sale is a "logical extension of IBM's strategy" to focus on more high-value, high-margin products and services, Loughridge said.

"[The PC business] has been focused more on profitability than market share," he said. "The PC business is taking on characteristics of home and consumer markets, which require enormous economies of scale [to operate effectively]. This extends IBM's reach where we are better served by a partner. The end result is that IBM can better focus on delivering technology and services to our enterprise customers and small and medium businesses--and better focus on our go-to-market strategy to improve service to customers globally."

During the transition period, IBM's lead-generation and compensation programs for product sales through Lenovo will be consistent with past practices, said Loughridge.

"Lenovo will sell through PC specialists, and IBM also will provide marketing support, demand-generation services for Lenovo products and its service offerings," he said. "It is extremely important that Lenovo be successful. Lenovo will benefit from our global sales-generation capabilities, our preferred relationship to provide Lenovo to our clients, economies of sale, local distribution channels, strong brand equity and an experienced management team."

The transaction will result in approximately 10,000 current IBM employees joining Lenovo. IBM said more than 40 percent of those employee are already in China, and less than 25 percent are in the United States. IBM said the transaction is expected to have minimal impact in the aggregate on employment, benefits and compensation at either company.

The new Lenovo will be based in New York, according to IBM.

CRAIG ZARLEY contributed to this story.