Mergers, Acquisitions and Takeovers Case Study

Lenovo Acquires IBM’s PC Division - Will Lenovo Gain?

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Abstract:

On December 8, 2004, Lenovo, China’s largest and Asia’s leading Personal Computer (PC) vendor, announced that it would acquire global giant IBM’s PC division. Lenovo was reported to pay IBM, $1.25 billion, to get a foothold in the market of the global leading brand, and thus a gateway to other international markets. Further, the deal made Lenovo the world’s third largest producer of PCs after Dell and Hewlett Packard (HP), with around 8% of the global market share. IBM, in turn, acquired 18.9% stake in Lenovo, though it took its operations off its books after the acquisition. The deal was judged as a significant one for IBM as it tried to gain a good reputation in the burgeoning consumer markets of China through selling its PCs there. IBM was expected to sell its servers and services, on which the company wanted to concentrate after the acquisition, in China in the near future.

After the acquisition, during 2005-2006, Lenovo continued its significant profitable growth in the Chinese PC market and reached new heights in the global market. With IBM’s ‘Think’ products and self-brand ‘Lenovo 3000 series PCs’, Lenovo targeted the Small and Medium-sized Businesses (SMBs), along with IBM’s typical large enterprise market. On August 3, 2006, Lenovo reported results for the first fiscal quarter of 2006-2007 which ended on June 30, 2006. It showed in the report that its revenue of $3.5 billion jumped 38% from the same period in 2005. However, analysts claimed it as misleading. They stated that the first quarter figure of 2006 added IBM’s three months of revenue, whereas the same period previous year included the global giant’s two months of revenue. The fact was, based on IBM and Lenovo’s 2003 sales figure, it was clear that 75% of the joint venture’s revenue would come from IBM’s PC business. Further, it was also known that Lenovo had to rip the IBM-Think brand name after 5 years from the completion of the agreement. Hence, analysts seemed skeptical about Lenovo’s success in the international scene in the future. They questioned whether Lenovo would be able to maintain its ‘new’ revenue figure and hence would gain from the acquisition after 5 years, as the global PC buyers were likely to refuse the IBM products without the ThinkPad tag.

Pedagogical Objectives:

• To understand the global PC market
• To understand Lenovo’s acquisition strategies
• To understand advantages of acquisition to Lenovo
• To analyse whether the acquisition will payoff.

Keywords : Mergers,Acquisitions,Alliances Case Study;Acquisition; IBM-Brand name; Global PC market; Chinese PC market; Thinkpad; Intellectual Property; Agreement; expansion plan; IBMs Servers and services; IBMs PC Division; entry strategy; joint venture; small and medium based business; integration plan; low price; tough competition

Contents : 
The Global PC Market in 2005-2006
Worldwide PC Shipment in First Quarter of 2005
Lenovo & IBM before and after Acquisition
The Acquisition
The Making of the IBM-Lenovo Deal
Benefits for Lenovo
Lenovo: After the Acquisition
Lenovo’s ‘Think’ Performance
Lenovo’s ‘3000’ Performance