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IBM Sells PC Division to Lenovo

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Last Wednesday morning, the IT community woke up in a strange new world where IBM no longer makes personal computers. In an announcement that had been rumored in the press for days, Big Blue revealed that it is selling its Personal Computing Division to Lenovo Group for approximately $1.75 billion in cash and equities. Under the agreement, Lenovo will continue to make IBM-branded desktop and laptop computers with the help of the 10,000 IBM employees that it will hire. The sale will transform the China-based firm into the world's third largest PC vendor.

As part of the agreement, the two companies entered into a broad-based alliance under which IBM will market and sell Lenovo's IBM-branded PCs through its existing sales force and channel partners. While Lenovo will make the ultimate decisions on product development and sales strategies, it will do so in close coordination with IBM. To make that coordination easier, Lenovo is moving its worldwide headquarters to New York and will do much of its product development at IBM's old offices in Raleigh, North Carolina. For its part, IBM will act as the preferred services and customer financing provider to Lenovo.

IBM's decision to sell the Personal Computing Division is consistent with its strategy to become the leading provider of business transformation solutions and services. As part of that strategy, IBM has been gradually divesting itself of low-margin, commodity-like products that do little to help it realize its vision. That is why the company sold off its disk storage operations in 2003 and liquidated other low-margin businesses in previous years. From IBM's point of view, it makes sense to take these product lines off its balance sheet and establish "trusted supplier" relationships with their new owners. It matters little to customers whether the components of an IBM solution come directly from Big Blue or from these suppliers.

The Promise and the Peril

IBM is right to assume that its customers feel this way when it comes to most products. However, the IBM PC occupies a unique place in the minds of many corporate customers. Over the years, IBM's PC brands--and especially its ThinkPad laptops--have gained a reputation for being the Cadillacs among personal computers. Many companies think of IBM PCs as having more quality and innovation under their covers than competitive brands (albeit at a higher price). When an IBM PC sits on the desk of a person who makes IT buying decisions, it reminds that manager of those strengths. If the PC lives up to its reputation, it reinforces the manager's feelings about IBM. If it fails to do so, it can influence buying decisions not only about PCs, but also about other IBM hardware.

This highlights one of the PC's unique attributes...its ability to act as a proxy in the eyes of decision-makers for an IT vendor's entire product line. It is this ability that lends an extra measure of both promise and peril to the IBM-Lenovo agreement. If Lenovo maintains the quality and innovation of IBM-branded PCs while reducing their prices (an action that is highly likely), the agreement could be a spectacular success. Such a product line could attract new customers and channel partners while taking market share from industry leaders Dell and Hewlett-Packard. However, if the quality and innovation of those PCs suffers from the divestiture, IBM's competitors could take advantage of the situation to win back customers. Worse yet, the IBM-Lenovo PCs could negatively affect IBM's image in the eyes of IT decision makers. That could translate into reduced interest in other IBM products, including the iSeries servers that most of this column's readers support.

Fortunately, it appears that IBM can minimize such a negative scenario if it materializes. While the company has granted Lenovo the right to use its brand name over the next five years, it can withdraw the right after that period. This would allow IBM to distance itself from its former products should they become an embarrassment. Still, Lenovo could do some damage to its partner if it makes any serious missteps between now and 2008. If it does, the damage would likely be heavier among small and medium-size businesses than among the larger enterprises that have longer histories of working with IBM.

In short, IBM and Lenovo have more to gain or lose in this agreement than what first meets the eye. Despite industry talk about personal computers being a commodity, the IBM PC still occupies an iconic position in the eyes of many IT decision makers. The future of that icon is now at stake, and its success or failure will reverberate beyond the desktops that it occupies. Among all of the product lines that IBM has sold off, this is the one that it must monitor the most closely.

Lee Kroon is a Senior Industry Analyst for Andrews Consulting Group, a firm that helps mid-sized companies manage business transformation through technology. You can reach him at This email address is being protected from spambots. You need JavaScript enabled to view it..

LEE KROON
Lee Kroon is a Senior Industry Analyst for Andrews Consulting Group, a firm that helps mid-sized companies manage business transformation through technology.
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