Lenovo completes IBM PC acquisition

3 May 2005

Chinese computer giant Lenovo completed the transaction to acquire IBM’s PC division, creating a new international IT competitor and the third largest PC maker in the world.

Under the terms of the transaction, Lenovo has paid IBM US$1.25bn, comprised of US$650m in cash and US$600m in Lenovo Group shares, based on the closing price on the last day of trading prior to the December 2004 announcement. IBM’s ownership in Lenovo upon closing is 18.9pc. Additionally, Lenovo will assume approximately US$500m of net balance sheet liabilities from IBM.

IBM will record a pre-tax gain on the sale of approximately US$1bn. The gain will be reported when IBM releases its second-quarter 2005 financial results.

In a transaction announced at the end of March, Lenovo has agreed to the terms for a strategic investment of US$350m from private equity investment firms Texas Pacific Group, General Atlantic Group and Newbridge Capital Group. According to the agreement, Lenovo will issue US$350m worth of convertible preferred shares and unlisted warrants that can be converted into common shares of Lenovo. A meeting of Lenovo shareholders in relation to this strategic investment is scheduled for Friday week.

Subject to approvals by the Hong Kong Stock Exchange, regulatory authorities and a Lenovo shareholder vote, IBM’s ultimate consideration for the transaction is expected to be approximately US$800m in cash and US$450m in Lenovo Group stock, which, as currently proposed, would be accomplished by a repurchase of shares of Lenovo from IBM.

The new Lenovo management team will draw on the strengths of both companies. With the completion of the transaction, Yuanqing Yang will become chairman of Lenovo, succeeding Liu Chuanzhi, Lenovo’s founder, who has been named a non-executive director of the board. Stephen Ward, previously IBM senior vice-president and general manager of IBM’s Personal Systems Group, has been named chief executive officer of Lenovo and also appointed to its board of directors, effective immediately.

IBM has nominated Robert W Moffat and Henry Chow to sit on the Lenovo board as non-voting observers. After the private equity transaction closes, three additional new board members from the strategic investor group will join the board.

It is envisaged that Lenovo will have combined annual PC revenue of approximately US$13bn and volume of approximately 14 million units. “We expect to capture synergies starting today through leveraging the complementary nature of Lenovo and the PC division’s customer bases, product offerings and geographic coverage while using Lenovo’s highly sophisticated operating platforms,” Ward commented.

Ward added: “Lenovo’s leading research and development 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. Within weeks, we will be introducing new products as the new Lenovo.”

“The closing of this transaction is an historic event for Lenovo and marks a new era for the global PC industry,” said Yang, incoming chairman of Lenovo. “The new Lenovo’s strategy is based on what our customers want: high-quality products and world-class service. We are committed to delivering the highest quality, most innovative PC products and services to our customers to providing the best working environment for our employees and to creating value for our shareholders.”

By John Kennedy