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Wed, Dec 08, 2004 - Page 12 News List

IBM, Lenovo close in on deal

ACQUISITION TALKS The sale of IBM's PC business to the Chinese computer firm could be announced today, but observers warned the devil could be in the details

NY TIMES NEWS SERVICE , NEW YORK

IBM has reached an agreement in principle to sell its personal computer business to Lenovo, China's largest PC maker, in a deal valued at US$1 billion to US$2 billion, people close to the negotiations said Monday.

The sale is expected to be announced this morning in China, these people said; that is last night in the US. But the deal is complex, these executives cautioned, and the timing could slip or the companies could fail to reach a final agreement.

Trading in the shares of Lenovo Group, formerly known as Legend, was suspended Monday on the Hong Kong stock exchange. Later in the day, the company announced that it was engaged in "acquisition talks with a major international technology company."

The tentative deal would include features to retain IBM customers and maintain the IBM brand for a bridge period of a few years, people close to the talks said.

The goal, they added, would be to make the transfer of the business as smooth as possible and give Lenovo the best chance of retaining IBM customers. For a period, IBM would provide assistance with technical support and financing and access to IBM sales channels outside of China, these people said.

Providing these services would bring fees to IBM, and give the company a continuing stake in Lenovo's success. If IBM retained the technical support and financing parts of the business for a period, these could also have the effect of reducing the purchase price for Lenovo, according to industry analysts.

Technical support and financing, they said, tend to be steady and profitable businesses for PC companies because they are immune to the up-and-down cycles of the hardware business. So if Lenovo is only acquiring the PC hardware operations at first, the cost to the Chinese company might be reduced, they said.

Analysts also noted that Lenovo, which is partly owned by the Chinese government, might also be an attractive customer for IBM's business consulting practice, providing Lenovo with management expertise and technical know-how as it strives to become a force against the likes of Dell and Hewlett-Packard in the global PC industry.

For IBM, the sale of its personal computer business would enable it to focus its strategy on services, software and on selling larger server computers that power corporate networks and the Internet. The IBM server business, unlike its PC division, is consistently a profit leader for the company.

IBM does not break out the size of its personal computer sales precisely as part of its personal systems group, which includes computerized cash registers and handheld computers used in retailing. But analysts estimate the PC revenues at US$10 billion a year, with the business hovering at breakeven.

A sale would not have much of an impact on IBM's profits, analysts said, but it would remove a potential drag on its earnings and free up resources for the businesses that it is betting on for future profit growth, like services, software and server computers.

"IBM has made the determination that the PC business is not that significant strategically to the company, and it is a business that is not pulling its weight from a profitability and growth standpoint," said A.M. Sacconaghi, an analyst for Sanford C. Bernstein & Co.

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