The Telegraph
Since 1st March, 1999
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Red star rises over Big Blue
- Communist China's corporate arm embraces capitalist icon

Dec. 8: No one's screaming blue murder ' the Reds are coming! Forget summoning ICBMs, intercontinental ballistic missiles, America is talking IBM and building trans-Pacific business and cultural bridges.

A company partly owned by the communist government of China is taking over the PC business of IBM which brought the computer to the world. The deal is worth only $1.25 billion but will be to business bonds between the US and China what the ping pong ball was to the two countries' diplomatic relations.

That is not the only landmark Lenovo Group Ltd, China's largest personal computer company, and IBM, the world's third most precious brand, are setting.

China has been the economic success story of the world for over a decade but the deal signals its corporate arrival on the global stage. The combined PC business of the two will turn Lenovo from the eighth to the world's third largest player in the market with a share of 7.7 per cent and sales of $12 billion (last year's figure).

If China announced its global business aspirations with the transaction, IBM decided to move up the value chain. The sale of the PC business ' it pioneered the desktop in 1981 ' is a recognition by IBM that its own future lies farther up the economic ladder.

Big Blue, as the company is known, is as American and as multinational as it gets ' McDonald's and Coke included.

And this American MNC now sees more business sense in technology services and consulting, in software and in the larger computers that power corporate networks and the Internet.

All are businesses far more profitable for IBM than the PC portfolio, which has been in and out of the red since the company's hasty entry into the market in the early eighties.

The deal calls for Lenovo to pay IBM $650 million in cash, $600 million in stock and assume $500 million in debt. It took 13 months to negotiate and is expected to close in the second quarter of next year.

IBM will hold an 18.9 per cent stake in Lenovo, which will relocate its PC headquarters from Beijing to New York and possibly list shares on Nasdaq or the New York Stock Exchange.

The Reds are not only coming, they'll be all over the place.

But no one's talking red because that's not the colour of money. US companies are scrambling to have a piece of the action in the vast Chinese market.

'This is an encouraging sign of the increasingly sophisticated trans-Pacific ties between the United States and China,' said Timothy F. Bresnahan, an economist at Stanford University.

'Seeing the Chinese seeking these kinds of economic links can only be a good thing,' he added.

Chinese companies like Lenovo are increasingly seeking to tap into overseas markets, management expertise and technological skills. For instance, TCL International Holdings Ltd controls the RCA television brand through a joint venture it set up with France's Thomson

'Chinese companies want to have a bigger part of the value chain,' said William De Vijlder, chief investment officer at Fortis Investments. 'We will see that in the future, that Chinese companies who have been very successful, who are cash-rich, will use their financial states ' their financial health ' to buy stakes in other companies.'

IBM's move stems from the realisation that its interests in China will be better served by a close partnership with a local leader. It has agreed to hold on to its stake in Lenovo for three years with an option of extending it.

Lenovo will take ownership of IBM's 'Think' family, including its ThinkPad notebooks and its ThinkCenter desktop line. The products will retain the IBM logo for up to five years before switching to a Lenovo brand.

Stephen Ward, IBM senior vice-president, will become Lenovo's chief executive. Lenovo's current chief and president, Yang Yuanqing, will be the chairman.

Lenovo will hire 10,000 PC IBM employees, including about 2,300 in the US ' mostly in product design, marketing and sales.

What does it mean for India' First, it means it has been whupped by China again ' no Indian company has made such a prestigious acquisition. Second, some 1,000 employees of IBM's PC business in India will get their pay from Chinese hands, figuratively, that is. And, third, IBM PC users need not start fretting yet. Big Blue will continue to handle technical support, financing and warranty coverage globally for its former PC business.

Written with reports from The New York Times and Reuters

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