IBM - Big Blue Goes Red
The American icon sells off its PC business to a Chinese firm
In America, it's the end of an era. But in China, it's the start of one. When IBM announced last week that it would sell its Personal Computing Division to the Lenovo Group, China's biggest PC manufacturer, there was doleful acceptance among Big Blue's employees and shareholders. It was IBM, after all, that launched a transformation of home and office life when it introduced the PC in 1981, with prices starting at $1,565. Yet ruthless competition from Dell and Hewlett-Packard has since made the PC division virtually unprofitable. The time had come to jettison the underperforming unit.
For all the attention lavished on IBM and its evolution, however, the buyer in this case may be more significant than the seller. By purchasing rights to one of the most respected brand names in the world, Lenovo hopes to rocket from regional heavyweight to global giant. It's an audacious move that will test whether Chinese companies can escape their Communist roots and capture wealth beyond the Middle Kingdom's vast borders. And that, ultimately, will determine whether China becomes a true economic superpower or remains a mere supersupplier to other nations. "This is the big experiment," says Martin Reynolds, a fellow at the Gartner Group, an information technology consulting firm. "China is already the factory of the world. Now they're testing whether they can raise the value of that output."
Rising profit. For IBM, the Lenovo deal is a bonanza that accomplishes several things with minimal risk. With the PC division off its books, the $89 billion juggernaut estimates that its profit margin will improve modestly, and it will be able to focus more closely on its higher-margin software and consulting businesses. The sale, expected to be finalized in the first half of next year, would net IBM $1.75 billion in cash and stock, including an 18.9 percent stake in Lenovo. That could open new revenue streams to Big Blue, since Lenovo already controls 27 percent of the Chinese PC market and is likely to expand from consumer products into more-lucrative business technology. IBM would also continue to earn money servicing and financing PC s, which will carry an IBM label for five years even though they'll be made by Lenovo.
IBM also avoids the controversy that often accompanies such spinoffs. About 10,000 of IBM's 319,000 employees will go to work for Lenovo--40 percent of them already in China, slightly less than 25 percent in the United States--with no layoffs or changes in pay or benefits. That's unusual for the sale of a major business unit, which is often accompanied by painful restructuring meant to strip out costs and produce a quick return for the buyer.
For Lenovo, the deal is riskier--but there's more to gain. Even though few Americans have heard of the company, Lenovo has been a powerhouse in China for nearly a decade. It was founded in 1984 as Legend Group by Liu Chuanzhi, a government scientist who spent three years in a forced-labor camp in the late 1960s for criticizing Mao Zedong's Cultural Revolution. Legend got its foothold by distributing PC s made by HP and other western manufacturers. Like many Chinese firms that strike deals with outsiders, Legend learned the tricks of the trade from its more sophisticated partners, then copied them--by building its own machines, starting in 1990.
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