China's Lenovo Takes Over IBM PCs

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The Chinese computer company now in charge of IBM’s legendary PC
business said it will waste no time in proving itself in the global
marketplace.

In a statement released Sunday, Lenovo Group said it has completed
its $1.25 billion acquisition of IBM’s “Think” brand, including its ThinkPad
laptops, ThinkCentre desktop PCs, ThinkVantage software tools and
ThinkVision monitors.

While Lenovo commands one-third of the Chinese
marketplace, it is now considered third in the worldwide PC business
behind market leader Dell and HP .

The deal is still not finalized, however. Approval by the Hong Kong Stock Exchange, regulatory authorities and a Lenovo shareholder vote still need to take place.

Executives with the company are confident in calling the acquisition
decided, in part they said, because they are ahead of schedule
finalizing the paperwork. Steve Ward, former IBM executive and now
Lenovo CEO, said the company would now concentrate on shipping new
products in a few weeks.

“Lenovo is well-positioned, with competitive strengths in branding, world-class scale and industry-leading efficiency,” Ward said in a statement. “Lenovo’s leading R&D and product differentiation capabilities, experienced management team and global distribution network — through our unique alliance with IBM — give us a powerful competitive position in global markets.”

Ever since the original acquisition plans were announced December 8, 2004, the deal has gotten mixed reviews. The U.S. Federal Trade
Commission and Lenovo’s shareholders approved the transaction near the
end of January this year, but some U.S. regulators were a bit more
skeptical.

The U.S Treasury Department-chaired Committee on Foreign Investment
in the United States (CFIUS) reviewed the sale after members of the
Department of Homeland Security and the Justice Department raised
concerns about the sale of IBM’s PC business and its impact on national
security.

On March 9, the 11-member committee signed off on the transaction,
but not without requiring some concessions, including requiring Lenovo to give up access to some of IBM’s U.S. government accounts including its vendor status with the U.S. General Services Administration for government computers.

As part of the concessions, Lenovo now has its executive headquarters in the city of Purchase, New York, in Westchester County. The company’s principal operations remain in Beijing, China and Raleigh, North
Carolina, with R&D facilities in Beijing, Shenzhen, Xiamen, Chengdu, and
Shanghai, China; Tokyo, Japan; and Raleigh.

Lenovo’s primary PC manufacturing and assembly facilities will remain
in Shenzhen, Huiyang, Beijing, and Shanghai, China. Lenovo’s mobile
handset assembly facilities are in Xiamen, China. Additional
manufacturing and distribution facilities are located in the United
States, Mexico, Brazil, Scotland, Hungary, India, Malaysia, Japan, and
Australia. Lenovo said its PC distribution network includes
approximately 4,400 retail outlets in China for the consumer business.

The company is also boasting a worldwide workforce of more than
19,000 people.

“The closing of this transaction is an historic event for Lenovo and
marks a new era for the global PC industry,” Yuanqing Yang, Lenovo
chairman of the board, said in a statement. “The new Lenovo’s strategy
is based on what our customers want: high-quality products and
world-class service.”

Executives said the quickest path to transitioning IBM’s Think brand lines to Lenovo will come through their procurement and marketing expenses as well as expanding to new markets.

The new Lenovo will have combined annual PC revenue of approximately $13 billion and volume of approximately 14 million units.

“We expect to capture synergies starting today through leveraging the
complementary nature of Lenovo and PCD’s customer bases, product
offerings and geographic coverage while utilizing Lenovo’s highly
sophisticated operating platforms,” Ward said in a statement.

As part of the acquisition announcement, Lenovo firmed up its
executive management team. As expected, Yang has become chairman of
Lenovo succeeding Liu Chuanzhi, Lenovo’s founder, who has been named a
non-executive director of the board.

Ward, previously IBM senior vice president and general manager of
IBM’s Personal Systems Group, will serve as CEO and as a board member.

IBM said it has nominated Bob Moffat and Henry Chow to sit on the
Lenovo board as non-voting observers. Moffat is a senior vice president
with IBM’s Integrated Supply Chain division and also serves as member of
the Board of Trustees for The Manufacturing Institute, an educational
and research affiliate of the National Association of Manufacturers.
Chow is general manager and CEO of IBM in Greater China.

Lenovo also announced that Linan Zhu has been appointed as a
non-executive director, replacing Maochao Zeng who has resigned from the
board.

Under the terms of the deal, Lenovo paid IBM $1.25 billion in a
combination of about $650 million in cash and $600 million in shares.
Contrary to reports in March that its stake in the new company had been
diminished, IBM’s ownership in Lenovo remains at its original 18.9
percent. IBM also gains a 5-year contract to hold onto the licensing
rights to ThinkPad and ThinkCentre brands. In addition, IBM’s Global
Financing and Global Services will be preferred providers to Lenovo for
leasing and financing services as well as for warranty and maintenance
services. As a side effect of the agreement, Lenovo is taking over $500
million in debt and other liabilities from IBM.

Part of that $500 million is coming from an infusion of investments
from three U.S. equity firms. As previously
reported, Texas Pacific Group (“TPG”), General Atlantic (“GA”) and
Newbridge Capital (“Newbridge”) gave Lenovo Group a combined amount of
$350 million as a strategic investment. Lenovo shareholders will get a
chance to discuss the strategic investment as part of a meeting
scheduled on May 13. Lenovo’s board will also get three new board
members from the strategic investor group.