From Ibm to Lenovo

Background Information:

Lenovo, formerly known as Legend, is the largest PC maker in China. The company was founded in 1984 as a distributor of IT products. Over the years it started its own PC business, growing into the No. 1 spot in China. It also sells products ranging from cellular phones to supercomputers. During 2002, it ramped up plans to sell PCs globally. It even opened a Silicon Valley office and started selling laptops in Spain under its QDI brand. But it has been beaten back by competition from multinational PC makers, such as Dell, which have been growing rapidly in China. Dell, for instance, recently won a $10 million contract with Beijing's municipal government to supply Optiplex to primary and middle schools. Lenovo said it has responded to "irrational price competition among second-tier PC vendors and increased effort of foreign brands" with price cuts of its own. Despite the concerns of customers, industry analysts have said it could be a wise move for IBM to get out of building PCs. The timing could also be favourable. Although 2005 is expected to be a relatively good year for the PC industry, those good returns will give way to several years of slower sales of PC hardware, analysts have predicted.

By the end of 2005, many businesses and consumers will have replaced their oldest computers, completing the latest PC replacement cycle. Given that owners typically replace desktops every four years and notebooks every three years, there is likely to be a drop in demand between 2006 and 2008. That period will see average annual unit shipments slow to 5.7 percent and revenue growth drop to 2 percent. So-called emerging markets such as China are expected to see the best growth during that time, a boon for a potential IBM-Lenovo joint venture. But that could be offset by slack demand elsewhere, leading to further consolidation if PC makers don't prepare now by lowering their costs.

Summary of the Main Point of the Book:

Under the deal, IBM will take an 18.9 percent stake in Lenovo. Lenovo will pay $1.25 billion for the IBM PC unit and assume debt, which will bring the total cost to $1.75 billion.

Lenovo will pay roughly $650 million in cash and $600 million in securities.

Based on both companies' 2003 sales figures, the joint venture will have an annual sales volume of 11.9 million units and revenue of $12 billion, increasing Lenovo's current PC business fourfold.

Lenovo will be the preferred supplier of PCs to IBM and will be allowed to use the IBM brand for five years under an agreement that includes the "Think" brand. Big Blue has promised to support the PC maker with marketing and via its IBM corporate sales force.

Lenovo is the ninth largest PC maker worldwide, according to the latest market share numbers.

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