Culture Bridge?

Sale of I.B.M. PC Unit Is a Bridge Between Cultures

By STEVE LOHR

Published: December 8, 2004

International Business Machines Corporation

Mergers, Acquisitions and Divestitures

I.B.M. announced late yesterday the sale of its personal computer business to Lenovo, China's largest personal computer maker, a deal that reflects the industrial and economic ambitions of not only the two companies but also their two nations.

Under Lenovo's ownership, the I.B.M. personal computer business will continue to be based in the United States and run by its current management team. I.B.M. will take a stake of 18.9 percent in Lenovo, which is based in Beijing but plans to have headquarters in New York.
The significance of the deal may exceed the relatively modest amount that Lenovo is paying: a total of $1.75 billion in cash, stock and debt.
The transaction - The Times reported late last week that I.B.M. had put its PC business up for sale - points to the rising global aspirations of corporate China as it strives to become a trusted supplier to Western companies and consumers. The sale also signals a recognition by I.B.M., the prototypical American multinational, that its own future lies even farther up the economic ladder, in technology services and consulting, in software and in the larger computers that power corporate networks and the Internet. All are businesses far more profitable for I.B.M. than its personal computer unit.
But the move signals an acknowledgment by I.B.M. that its future in China may be best served by a close partnership with a local market leader - particularly one, as in Lenovo's case, that is partly owned by the Chinese government. The chief executive of Lenovo will be Stephen M. Ward Jr., currently an I.B.M. senior vice president in
charge of the PC business. Lenovo's current chief and president, Yang Yuanqing, will become Lenovo's chairman.

American companies, in one industry after another, are scrambling to take advantage of the vast potential of the Chinese market. Chinese companies like Lenovo, meanwhile, are increasingly seeking to tap into overseas markets, management expertise and technological skills.

"This is an encouraging sign of the increasingly sophisticated trans-Pacific ties between the United States and China," said Timothy F. Bresnahan, an economist at Stanford University. "Seeing the Chinese seeking these kinds of economic links can only be a good thing."
The complex transaction is meant to serve as a bridge between very different companies from different cultures, by seeking to ensure that I.B.M. has a stake in the Chinese company's success. Whether in the United States, in China or anywhere else in the world, such a stake would be in I.B.M.'s self-interest; a messy exit from the personal computer industry could rankle corporate customers, hurting I.B.M.'s other businesses, and tarnish its stellar brand name.
I.B.M. has agreed to hold onto its stake in Lenovo for three years, the companies said, with an option of extending it. I.B.M.'s financial commitment to Lenovo could help open doors for its efforts to win other business in China.
The senior management of the current I.B.M. personal computer business will join the Chinese company, led by Mr. Ward and Fran O'Sullivan, the general manager of I.B.M.'s personal computer division.
Besides management expertise, Lenovo would be acquiring five-year brand-licensing rights to a computer business best known for its I.B.M. Thinkpad notebooks, its sleek black desktops and the product line's distinctive tricolor I.B.M. logo.
While Lenovo will have its headquarters in New York, the hub of the I.B.M. PC business is in Raleigh, N.C., where its design and development operations are based. I.B.M. employs about 10,000 people worldwide in its PC business, although fewer than a quarter of those workers are in the United States. In fact, 40 percent already work in China.
Under the agreement, I.B.M. will continue to handle technical support, financing and warranty coverage globally for its former personal computer division. Those tend to be steady and profitable cash-generating businesses, even as the PC business itself has been only intermittently profitable for I.B.M. lately. It was I.B.M. that moved the personal computer industry from a hobbyist market into the corporate and consumer mainstream with its first PC in 1981. But as the company lost its PC market leadership to nimbler players, the company has pulled back its commitment to the
business, first by getting out of retail sales and, in 2002, passing off its desktop PC manufacturing to a Silicon Valley contractor, Sanmina-SCI.
Today, I.B.M. is a distant third in worldwide PC market share, behind Dell and Hewlett-Packard. I.B.M.'s personal computer sales are about $10 billion a year, or about 11 percent of its $89 billion in revenue, but it has hovered between slight profits and losses in recent years.
In its hasty entry into the PC business in the early 1980's, I.B.M. made what turned out to be a strategic mistake: it chose outside suppliers for the crucial technologies of the microprocessor and the software operating system,helping Intel and Microsoft become two of the most profitable companies in the worl
For nearly a decade, executives have debated dropping out of the personal computer business. Samuel J. Palmisano, who became I.B.M.'s chief executive in 2002, finally made the move. He decided that the company's management and investment resources would be better used in its other businesses like software and services to help customers use information technology to help automate business tasks from product design to procurement."The PC business is just not that important anymore to I.B.M. strategically," said A. M. Sacconaghi, an analyst at Sanford C. Bernstein & Company. "Palmisano has decided to focus instead on businesses that are more profitable for I.B.M. and promise higher growth."
In a statement, Mr. Palmisano said the PC industry "continues to take on the characteristics of the home and consumer electronics industry which favors enormous economies of scale and a focus on individual users and buyers," while I.B.M. will focus more on the corporate market.Still, industry analysts say, it is not clear that a business that was struggling under I.B.M. will thrive under Lenovo. Worldwide growth in PC sales, according to Gartner, a research firm, will slow to about 2 percent a year from 2006 to 2008, less than half the projected revenue
gains of 4.7 percent a year from 2003 to 2005. The number of PC makers, analysts say, will probably be winnowed in the next few years.
"Lenovo aspires to become a major international player and a recognized brand, a company with the ability to sell into multinational corporations and be profitable," said Leslie Fiering, an analyst for Gartner. "This deal improves its chances, but the business is only going to get tougher over the next few years."
The personal computer industry, like most technology businesses, is not one in which low labor costs - one of China's advantages in competing with Western rivals - are much of an edge. The big winner in the business, Dell Computer, is mainly a master of ultra-efficient management of its suppliers, assembly and distribution.
I.B.M.'s rivals said the Lenovo purchase would create uncertainty among customers and provide opportunity for them. "It's hard to think back on a successful large merger in the computer industry, and I don't see this one being different," Michael S. Dell, chairman of Dell Computer, said yesterday. "We like to acquire our competitors one
customer at a time".
Andrew Ross Sorkin, in New York, and Gary Rivlin, in San Francisco, contributed reporting for this article.

Courtesy of:
http://www.nytimes.com/2004/12/08/technology/08computer.html?pagewanted=2