01 May 2005
On May 1, Lenovo Group Limited and IBM announced the completion of the acquisition of IBM's Personal Computing Division by Lenovo.
A copy of the announcement press release is available here.
The acquisition creates, in Lenovo, the third-largest personal computing company in the world, with approximately $13 billion in revenues, annual product volumes of roughly 14 million units (for 2004 calendar year, according to IDC), and about a 7 percent market share in the global PC market.
Under the terms of the transaction, Lenovo has paid IBM $1.25 billion, comprising approximately $650 million in cash and $600 million in Lenovo Group common shares. IBM's ownership in Lenovo upon closing is 18.9 percent. Additionally, Lenovo will assume approximately $500 million of net balance sheet liabilities from IBM.
IBM will record a pre-tax gain on the sale of approximately $1 billion. The gain will be reported when IBM releases its second-quarter 2005 financial results.
In a subsequent transaction announced on March 31, 2005, Lenovo will receive a strategic investment of $350 million from leading private equity investment firms Texas Pacific Group, General Atlantic LLC and Newbridge Capital LLC. Per the agreement, Lenovo will issue $350 million worth of convertible preferred shares and unlisted warrants that can be converted into common shares of Lenovo. A Lenovo shareholder meeting in relation to this strategic investment is scheduled on May 13, 2005.
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 $800 million in cash and $450 million in Lenovo Group stock, which, as currently proposed, would be accomplished by a repurchase of shares of Lenovo from IBM .
As a result of the divestiture, the change in IBM's top line going forward will reflect the loss of Personal Computing Division revenues. It also will eliminate the volatility associated with the cyclical PC business.
By divesting of a lower margin business, IBM's profit margin-both gross and net-will improve. Based on our current profile, without the PC business, IBM's Pre Tax Income margin would be just over one point higher.
This pre-tax income improvement is based on expectations that total gross margin will improve by roughly 3 points, offset in part by an increase in IBM's expense-to-revenue ratio of roughly 2 points.
On April 20, 2005, the company announced that the Printing Systems Division and Retail Store Solutions (other divisions of the Personal Systems Group segment) will become part of the Systems and Technology Group. Prior to the close of the second quarter, IBM will provide historical information on PC Divison revenue and pre-tax income consistent with our new management system, or reporting segment, view.
The direct resources associated with the PC business are transferring to Lenovo. Much of the sales resource and infrastructure that has supported this business was not dedicated, and so will remain with IBM. The transition services agreements and marketing support agreements established with Lenovo recover the majority of these support costs.
As a result, the divestiture of the PC business is expected to have no material impact to IBM's earnings per share in the second half of 2005.