BEIJING – Chinese computer maker Lenovo Group (search) said Wednesday it will take over IBM's (IBM) personal computer business, creating the world's third-largest PC maker in a $1.75 billion deal that announces China's ambitions to become a key player in the global industry.
The deal — one of the biggest foreign acquisitions ever by a Chinese company — was expected to quadruple sales of Lenovo, already Asia's biggest computer maker, the companies said.
It also extends IBM's long-running transition from leader and innovator in computer hardware to a dominant force in computer services, software and consulting.
Lenovo, formerly known as Legend, joins a wave of Chinese firms with aggressive plans to expand abroad.
"This acquisition will allow Chinese industry to make significant inroads on its path to globalization," Lenovo chairman Liu Chuanzhi said at a news conference. "It has changed the structure of the global PC manufacturing business."
Lenovo will take over IBM's desktop PC business, including research, development and manufacturing for $1.25 billion in cash and shares, while IBM will retain a 18.9 percent stake, Liu said.
Lenovo also agreed to take on liabilities that raise the total value of the deal for IBM to $1.75 billion.
The Chinese company will be allowed to use IBM's brand name under a licensing agreement, Liu said.
The companies appear to have structured the deal to ensure that IBM still has a say in the PC business, despite its small stake.
Lenovo Group's worldwide PC business will move its headquarters to New York.
Lenovo was founded in 1984 by academics at the government-backed Chinese Academy of Sciences (search) and first worked out of a small cottage. Initially set up to distribute equipment made by IBM and other companies, by 1990 it was selling PCs under its own brand name.
IBM focuses on consulting and software, outsourcing much of its manufacturing.
The sale to Lenovo was expected to cut production costs and breathe new life into the PC business, which accounts for a small portion of IBM's total sales and profits.
"The IBM brand will gain great recognition in China, the world's fastest growing economy and the world's fastest growing market for PCs," said John Joyce, IBM senior vice president and group executive of IBM Global Services.
Beijing-based Lenovo has 27 percent of China's computer market. Its shares are traded in Hong Kong.
The deal follows numerous troubled mergers of hardware makers.
AT&T Corp. (T) lost billions after its 1991 union with NCR Corp. before cutting the company loose in 1996. And Compaq Computer Corp.'s 1998 takeover of Digital Equipment Corp. promised benefits that never materialized.
Lenovo will need to branch out in services and other areas as profit margins for manufacturing shrink, said Duncan Clark, managing director of the consulting firm BDA China Ltd.
"It's not going to be easy, but they're certainly not shying away from any of these challenges," Clark said. He suggested Lenovo call the new venture "Big Red" — a play on IBM's Big Blue nickname and China's red national flag.
Both IBM and Lenovo have seen profit margins suffer amid aggressive competition.
IBM had 5 percent of the worldwide PC market in 2004, selling 6.8 million units, according to Gartner Inc., a U.S. technology consulting firm. That compares with 16.4 percent for Dell Inc. and 13.9 percent for Hewlett-Packard Inc., which makes the HP and Compaq brands.
Chinese firms' ambitions will only grow, Clark said.
"It's this combination of this large market, manufacturing base, engineering talent," plus government encouragement to Chinese companies to make their mark abroad, he said.
Lenovo's announcement Wednesday followed reports that a deal was imminent. As speculation mounted Tuesday, IBM's stock fell $1.57 per share to $96.10 in trading on the New York Stock Exchange. Shares rose 10 cents in after-hours trading, to $96.20.
IBM sought to reassure jittery investors, customers and employees, emphasizing its focus on continuity.
About 10,000 IBM employees will move to Lenovo, joining the Chinese company's current staff of about 9,000, the companies said. Fewer than a quarter of those 10,000 are based in the United States and 40 percent already work in China.
IBM, based in Armonk, N.Y., has nearly 320,000 employees.
Lenovo said the new PC maker's chief executive will be Stephen M. Ward Jr., an IBM senior vice president and general manager of IBM's Personal Systems Group. Lenovo's current president and chief executive officer, Yang Yuanqing, will be chairman of the PC business.
Lenovo's shares in Hong Kong were suspended Monday pending the announcement and were to resume trade on Thursday. On Friday, the stock closed at 34 cents.