December 7, 2004 7:27 AM PST
IBM appears close to PC deal
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The two companies are said to be negotiating a deal to form a complex joint venture that would make Lenovo the third-largest PC maker in the world behind Dell and Hewlett-Packard, but would still give IBM a hand in the PC business. The expected deal would also mark the latest round of consolidation in an increasingly mature and thus slower-growing world PC market.
After coming close to disaster, Big Blue regained its status as an industry leader. How long does the momentum last?
The sale is expected to be announced on Tuesday evening, U.S. time--that is, Wednesday morning in China, the New York Times reported Monday. The paper also said that the timing could change or that the two companies could still fail to reach an agreement. Lenovo's statement did not name its potential partner.
IBM has been moving away from so-called commodity products toward selling services, software and high-end computers, so previously reported, a deal with Lenovo would relieve it from managing its challenging and often money-losing PC group, while still giving it access to desktops and notebooks to provide to its customers. IBM could also be eyeing making inroads into the Chinese market as part of the deal. Although it might be giving up a controlling stake in its PC business by working with a local company, Big Blue could gain an edge in selling servers and services in China, a fast-growing market targeted by a number of U.S. tech giants.
A sale could also bring a substantial cash infusion. Big Blue's PC business could fetch as much as $2 billion, the New York Times said Friday when it reported that IBM has been negotiating with Lenovo, formerly known as Legend, and at least one other buyer.
IBM has declined to comment on any potential deal. Lenovo representatives did not return phone calls seeking comment.
IBM should sell
A deal would fit Big Blue's goal of escaping tight margins and focusing on fatter profits.
"Based on our analysis of the potential impact and our discussions with industry contacts, we think that the reports are accurate and a deal is likely to be announced soon, which we view as a net positive" for IBM, Steven Fortuna, an analyst with Prudential Equity Group, wrote in a report on Tuesday.
The acquirer of IBM's PC business, Fortuna said, would gain use of the IBM brand, including the ThinkPad name, the intellectual property behind the company's PCs, along with greater scale and purchasing power. Meanwhile, Big Blue would free itself from losses associated with manufacturing PCs. Although IBM's Personal Systems group breaks even or is slightly profitable in a given quarter, Prudential's analysis shows that the profit comes from the cash registers and peripherals IBM sells and not its PCs, which by themselves would lose money.
"We believe a joint-venture structure in PCs makes sense between the companies, as the buyer would collaborate with IBM design teams for a period of a few years and the buyer would assume control of manufacturing," Fortuna wrote.
But many questions remain about the details of any new arrangement. Among them are how the IBM PC group's new owner would handle customer support and marketing, including how it will use the IBM and Think brand names, as well as its manufacturing strategy.
Right now, IBM manufactures ThinkPad notebook models in a joint venture with Great Wall Technology in a factory in Shenzhen,
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