If You Want to Understand IBM Selling Its PC Division, Just Look East

Bob has an interesting analysis of the sale of IBM’s PC division to China – based Lenovo…

The China Syndrome

This week, as anyone knows who reads the business section of their local newspaper [knows], IBM sold its personal computer division to Lenovo, a company presently based in mainland China. How far we have come! When IBM announced what was then its Entry Systems Division and introduced to the world the underpowered, overpriced, but fantastically successful IBM Personal Computer, China wasn’t even a major trading partner with the U.S. Who would have guessed that times would change so much and so quickly? And who also would have guessed that all the analysis we’ve been reading about this transaction could be so shallow and misleading? There is far more to this deal than people are being told.

The simple story — and the only one that made it in most papers — is that IBM hasn’t made much of a profit on PC products for years, so selling out is a simple way of improving corporate results and shifting capital to where it can be used more profitably. Well, yes and no. PCs HAVE become a commodity, and IBM hasn’t made money on them since the late 1980s, but this story goes far beyond raising gross margins and cutting pension liabilities.

Take a look at the price, for one thing. There is a mix of cash and stock and assumption of debt amounting — all-told — to about $1.8 billion, which is a lot of money, but remember, this is for a chunk of IBM that last year produced $9.2 billion in sales. Setting the price at 20 percent of sales sure seems low, even if there is little profit. The question that ought to be asked and generally hasn’t been is, “What would Carly Fiorina of Hewlett-Packard have paid for the same property?” Carly, whom you’ll remember not that long ago paid $25 billion for Compaq Computer, would certainly have paid two to three times what Lenovo has for the chance to leapfrog Dell and become the world’s largest producer of personal computers, along with the largest computer company of any kind.

Okay, so IBM didn’t want to make HP an even bigger competitor, then why not sell to a big Japanese player like NEC, which after all paid more than $1.8 billion for Packard Bell, of all things. The dollar is down, the yen is up, and the cost of corporate borrowing in Japan is almost free, so why didn’t IBM sell to a Japanese company? Or a European one? Or even another American company? Gateway paid more cash for e-Machines than Lenovo is paying for IBM; Wouldn’t Ted Waitt have ponied-up big bucks for the use of the IBM brand? Of course he would have.

What is absolutely key to this deal is that the buyer is Lenovo, the largest Chinese PC manufacturer. Yes, the division was unprofitable and IBM would have eventually had to do something about it, but Sam Palmisano wanted a Chinese buyer and was willing to accept far less cash than he might have received elsewhere just to get the buyer he wanted.

IBM got rid of a headache and in doing so, gained unique access to what will shortly be the world’s largest IT market. This deal is all about China, not the U.S.