IBM to Sell Its PC Division

IBM Corp. said Tuesday that it was selling the lion’s share of its money-losing personal computer division for $1.25 billion to China’s largest computer maker in a deal that would take IBM out of the PC business it pioneered 23 years ago.

The sale, which had been rumored for days, would vault Lenovo Group to the rank of No. 3 PC vendor in the world and give it entree to IBM technology and customers in the U.S., Europe and Asia.

For China, the move would be far more important symbolically than financially. After more than two decades of market reform and establishing itself as the low-cost manufacturer of shoes, toys and radios, the country wants to step up to the next level and compete globally in the market for high-value goods, with technical expertise and respected brands.

Tuesday’s announcement “represents China’s maturation as an economy,” said Donald Straszheim, a Los Angeles business consultant who specializes in China. “This could not have happened two or three years ago.”

The two companies agreed that Lenovo would pay IBM $600 million in cash and $650 million in stock, IBM Chief Financial Officer Mark Loughridge said in a conference call with analysts and reporters. The deal also includes the assumption of $500 million in debt, bringing the total value of the transaction to $1.75 billion.

IBM would keep an 18.9% stake in the business, which would be headquartered in New York, with principal operations in Beijing and in Raleigh, N.C.

The move away from PCs would reduce IBM’s revenue, Loughridge said, but the sale would “also eliminate the volatility associated with the cyclical PC business.”

Technology industry analysts in the U.S. said the outcome would be good for both companies.

If the sale is approved by antitrust regulators and IBM shareholders, IBM will shed an unprofitable business in a cutthroat pricing environment and Lenovo will be able to better serve fast-growing computer markets in China and elsewhere in Asia.

IBM introduced personal computers to the world in 1981, and its name became practically synonymous with PCs as users bought “IBM-compatible” machines, or “IBM clones.”

Over time, however, as the market became crowded with other brands frequently competing on price, IBM began to focus on more-expensive server computers, corporate customers, computer services and software, and didn’t heavily advertise its PCs.

Sales of IBM’s desktop and laptop computers, including the ThinkCentre desktop and ThinkPad laptop brands, have shrunk to a fraction of the company’s overall business and are dwarfed by those of rivals Dell Inc. and Hewlett-Packard Co.

IBM’s share of the global PC market fell from 8.8% in 1996 to 5.8% last year. In the same period, HP went from 15.8% to 16.2% and Dell zoomed from 4.2% to 16.7%.

But even though IBM’s PC business loses money, it’s a prized asset with annual revenue of $10 billion. With it, Lenovo also would own the computer giant’s “valuable global brand” and IBM’s “greater scale and purchasing power,” analyst Steve Fortuna of Prudential Equity Group said in a report to investor clients.

For its part, Lenovo -- which totals about $3 billion a year in PC revenue -- has low-cost manufacturing expertise that could turn an unprofitable business into a moneymaker.

“A Chinese company could bring manufacturing costs down further and squeeze more profit out of the business,” said Michael Cohen, research director for Pacific American Securities. “It’s a way of expanding from a low-cost manufacturing company to a global PC player.”

The new Lenovo PC business would have revenue of $12 billion and worldwide market share of 8% based on 2003 results, Loughridge said. It would have about 19,000 employees, including some 10,000 IBM employees, more than 40% of whom are in China.

Before news of the deal broke, IBM shares fell $1.57 to close at $96.10 on the New York Stock Exchange. The shares gained 10 cents in after-hours trading.

Times staff writer Don Lee in Shanghai contributed to this report.