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IBM Sells PC Business to Chinese Firm in $1.75 Billion Deal

"Big Blue" once symbolized America's tech prowess, with roots dating back to 1911, but the company gradually withdrew from the PC market. IBM eventually sold its disk-drive business and stopped marketing its computers to the consumer market altogether.

Ultimately, a college student named Michael Dell who started selling computers from his dorm room in the 1980s helped push IBM from the business.

IBM Deal Puts Lenovo on Global Stage (The Washington Post, Dec 8, 2004)
Video: IBM is selling a majority stake in its pioneering personal computer business to China's biggest computer maker, Lenovo Group, for $1.75 billion in cash and stock.
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PC Sector Sale By IBM Would Signal Change (The Washington Post, Dec 4, 2004)
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IBM Claims Computer Speed Title (The Washington Post, Sep 29, 2004)
IBM to Open Office in Fairfax County, Creating 1,200 Jobs (The Washington Post, Sep 24, 2004)
IBM to Build Army Supercomputer (The Washington Post, Aug 3, 2004)

With obsessive attention to supply-chain efficiency, Dell drove prices in the computer industry down and helped bring computers to the masses by finding cheaper and cheaper ways to produce them. At a tech conference in San Francisco, Dell -- also now among the world's richest men -- said he doubted a Lenovo-IBM combination would prove successful.

"We're not big fans of the idea of taking companies and smashing them together," he said. "When was the last time you saw a successful acquisition or merger in the computer industry? It hasn't happened in a long, long time."

Under the terms of the deal, Lenovo would pay $650 million in cash and up to $600 million in common stock. Lenovo would also assume $500 million in IBM liabilities. Once the transaction closes, Lenovo would have about 19,000 employees. About 10,000 IBM employees -- more than 40 percent of whom are already in China and less than 25 percent of whom are in the United States -- would join Lenovo.

The companies plan to conclude the deal by mid-2005. "We fully expect Lenovo to be a formidable competitor in the global PC market," Loughridge said.

IBM has been headed away from the razor-thin margins of the PC business for years, pursuing instead the wider profit margins of corporate consulting contracts. The company's Global Services division is the largest tech consulting business in the world and pulled in more than $40 billion in revenue last year.

With such profitable avenues available to the tech icon, many industry watchers approved of the rationale behind such a deal even before Big Blue released the details of its agreement with Lenovo. After all, other rivals have already started pairing up. Hewlett-Packard gobbled up Compaq Computer Corp.; Gateway Inc. bought eMachines Inc.

"IBM just can't make money in the PC business, they don't have a prayer on any front," said Simon Yates, analyst at Forrester Research Inc. "They simply are not doing a good job from a market share perspective in competing against HP and Dell."

IBM's move may not be the last sell-off or consolidation in this industry. "We firmly believe that more actions like it are to be expected," said Mark Margevicius, a Gartner Research analyst. Weeks before IBM's announcement, Margevicius released a report predicting that three more of the top 10 computer makers will leave the PC market within four years.

For tech buyers, such tectonic changes in the computer industry may be no big deal. Gary Beach, publisher of CIO magazine, a publication aimed at technology executives, said that the IBM news "doesn't raise goose bumps" for him because executives in charge of purchasing technology for their companies "don't stay up late at night wondering which PC or notebook to buy."

Some said the success or failure of an IBM-Lenovo deal will depend on how IBM and its new partner handle the branding of IBM products such as IBM's ThinkPad line of notebook computers. As part of the deal, Lenovo has rights to the IBM brand name for five years.

Though Lenovo is the No. 1 PC maker in China, the company is largely unknown in the United States. "It's not like this is a fly-by-night, little-bitty company," said Stephen Baker, an analyst at NPD Group Inc. "They're a pretty substantial player, but they've never even tried to come over here." Baker said that it is more usual for computer makers to aim for the consumer PC market before trying to win over new customers in the tighter corporate arena.

While IBM is retreating from personal computers, it is not retiring from the hardware business entirely. IBM, Sony Corp. and Toshiba Corp., have been jointly working on a microprocessor called Cell that could be used in such electronic products as high-end computer workstations, digital TVs and video-game consoles. IBM also makes chips used in Apple Computer's products.

Michael Cohen, director of research for Pacific American Securities LLC, said he thinks IBM is trying to make a "stealth attack on Intel" with the chip -- exiting the PC market because it wants to try to make a larger impact on the microprocessors arena.

Perhaps IBM's hope is to come up with a product as ubiquitous as Microsoft's Windows operating system has turned out to be. "I think their hope is to supply everybody," he said.

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