It was during the waning weeks of 2004 that computing giant IBM announced it was selling its personal computer business unit to Chinese vendor Lenovo.
Many tech journalists who paid attention to the deal at the time — and I was one — upon learning the name of the buyer stared at their screens quizzically and asked out loud: “Who?”
China’s leading manufacturer of personal computers, was the the answer. Now it’s the world’s leading vendor of personal computers.
And in the space of two weeks it has reached deals to pay $2.3 billion for IBM’s mainstream server business and $2.9 billion for Motorola Mobility, the Google-owned maker of mobile handsets that as a standalone company dominated that business in the middle of the last decade.
Looking back, it’s worth remembering what a watershed the PC deal was for Lenovo. Lenovo paid $1.25 billion for a unit that brought in about $9 billion in sales, indicating how significant a drag on earnings the business was for IBM. Lenovo’s annual sales quadrupled to about $12 billion.
Lenovo inherited IBM’s ThinkPad line of notebook PCs, a well-regarded but premium brand popular with CIOs at corporations who were not exactly concerned about budgets. The brand gave Lenovo a marketing beachhead in regions where it was weak and reinforced it where it was strong. The company quickly gained a reputation for pricing aggressively and doing whatever was necessary to win. Nine years later, the only major market it doesn’t dominate is the U.S., where research firm IDC pegged it in fourth place behind Hewlett-Packard, Dell and Apple.
For its part, IBM got $650 million in cash and another $600 million worth of Lenovo shares, which gave it an ownership stake of about 19 percent. It held on to that position for about six years, and finally sold it off in 2011 at a profit of more than a quarter-billion dollars.
But that was secondary to IBM’s real goal: Strategic access to China. In a country where business decisions are rarely divorced from government policy, IBM gave a major Chinese company an opportunity to grow significantly. That helped pave the way for a solid entry into the Chinese market, which is now considered so important that when it doesn’t perform, IBM’s results suffer materially.
Now Lenovo is making acquisition plays for two more major parts of the global computing ecosystem: Servers and handsets, both of them from well-known American corporate names. With Lenovo already a significant player in both markets, these deals could wind up to be just as transformative as the PC deal was nearly a decade ago. In smartphones, Lenovo is already No. 4 in the world, behind Samsung, Apple and Huawei. And in servers, the combination with IBM will make it No. 3 in the world, behind HP and Dell.
Both deals will be subject to regulatory review by the Committee on Foreign Investment in the U.S. In 2004, buying IBM’s PC unit triggered not only the automatic 30-day review, but an additional investigation. Expect both of these deals to get the full range of scrutiny. Ultimately, approval will fall to President Obama.
At this point, it’s worth remembering that Lenovo is a partially state-controlled company. Its largest shareholder, controlling an ownership stake of about 32 percent, is China’s Legend Holdings. Legend is in turn partially owned by CAS Holdings, a 100-percent state controlled entity set up by the Chinese Academy of Sciences.
This connection to the state will cause some controversy in the U.S., though not nearly as much as the first deal did. There were stories about national security concerns, but CFIUS investigations only rarely lead to deals being canceled.
But “rarely” isn’t “never.” One notable case of a deal being blocked occurred in 2012 when the Obama administration vetoed a deal by a Chinese company to buy some wind farms in Oregon that were said to be too close to a U.S. Navy training facility.
Citing national security concerns will be a more difficult argument to make this time around. The majority of consumer and enterprise-grade computing products are already manufactured under contract by Taiwanese companies like Foxconn and Compal and Quanta.
What’s unclear — and what could in time become a controversial thread to this deal — is the fate of the U.S.-based plant that manufactures the Moto X smartphone. Obsessive about manufacturing efficiency and cost control, Lenovo has made no commitment to keep that plant running. Instead it will evaluate the most cost-effective ways of winning the market. That’s not likely to calm the fears of any critics of the deal, but in the end it’s unlikely to make much of a difference in getting the deal approved.
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