Lenovo's IBM PC merger closed

Eric Auchard

SAN FRANCISCO: Lenovo Group Ltd. and IBM on Sunday said they had closed a ground-breaking deal in which China's largest computer company acquired IBM's personal computer business, marking the rising ambition of Chinese companies to become global brands.

The agreement, first announced on December 8, had to overcome resistance from U.S. regulators due to Lenovo's ties to the Chinese government. It calls for Lenovo to pay IBM $1.25 billion in cash and stock and assume $500 million of IBM debt.

IBM said in a joint statement issued by the two companies that it will take a pre-tax gain of about $1 billion when it reports its second-quarter earnings results in July.

The combined $13 billion-in-revenue-a-year company brings together Lenovo, which sells nearly one-third of branded PCs in China, with IBM, whose ThinkPad brand is popular with business users globally, forming the world's third largest PC maker.

"We will increase the pace, not slow down the pace, of innovation and quality around the things that matter to our customers," Stephen Ward, Lenovo's new chief executive and the former head of IBM's PC business, said in a phone interview.

The new Lenovo will move its headquarters to New York from Beijing, seek to fuse executives from China and the United States and aim to show that Chinese companies can produce and sell world-class products, not just be low-cost PC makers.

"Lenovo is a premium Chinese PC supplier," said Roger Kay, a PC industry analyst with market research firm IDC in Framimgham, Massachusetts. "They are not a discount brand which is what people outside China might think," he said.

LENOVO JOINS THE CROWD

The deal catapults Lenovo, one of China's biggest corporate names, but one little-known globally, into a bruising competition with PC industry pace-setter Dell Inc., along with rival Hewlett-Packard Co.

Lenovo also must face off against a host of established Japanese names and upstart Taiwanese rivals that are expanding into North American, European and other markets.

Lenovo has opted for an expansion strategy in which it is, in effect, partnering with IBM, a strong international player, to move overseas. The Sino-American hybrid differs from the approaches taken by rivals, especially in Taiwan.

Acer Inc. of Taiwan makes PCs both on behalf of other companies, but also has resumed pushing its own brand after a mid-1990s overseas pullback. It now ranks as Europe's No. 1 notebook PC maker and has overtaken Toshiba of Japan as No. 5 PC maker in the world, according to IDC data.

Other major PC manufacturers from Taiwan, such as Asustek, BenQ and Micro-Star International, have been making selective moves into the U.S. and other markets.

"Greater China, including Taiwan, supplies almost everything to everyone in the PC industry," Kay said. "But on the branded side, it's been less successful so far."

Lenovo has taken a cautious approach to overseas expansion. In the late 1990s it set up an office in Silicon Valley to eye a move into the U.S. market, but decided against it.

More recently, it considered buying its way into the U.S. market through a deal to acquire the old Micron PC business, the remainder of which was owned by U.S. private equity firm Gores Technology, but was recently sold to HyperSpace.

Lenovo CEO Ward said that his company will ship both new Lenovo and ThinkPad products within weeks -- in part to show that the merger has not distracted it from further innovation. Lenovo is studying how to market its various brands, especially consumer products, in new markets outside of China.