China's Lenovo Group signed a definitive agreement on Wednesday to acquire IBM's personal computing division. Lenovo will pay $1.25 billion in cash for the business, which is expected to transform it into the world's number three PC maker, the companies announced.

In addition to money, IBM will also take an 18.9 per cent stake in Lenovo, they said. The cash and equity combined brings the total value of the deal to about $1.75 billion. The deal is expected to be completed in the second quarter of 2005.

A deal between the two companies comes as no surprise. It's been rumoured since last week's New York Times report.

IBM and Lenovo said customers will see no change in product availability and support, either while the deal is being completed or afterwards, while the PC operations of the two companies are integrated. Beyond the integration, the impact is of the deal is less clear.

Following the deal, the two companies will enter an alliance under which IBM becomes the preferred services and customer financing provider to Lenovo and Lenovo becomes the preferred supplier of PCs to IBM, they said.

"Lenovo products will be co-branded for the next few years, to leverage the power of the IBM ThinkPad brand with our existing and future customers," said Mark Loughridge, chief financial officer of IBM in a telephone conference call.

"We will have a phased implementation with products initially using the IBM logo as the primary brand and transitioning over 60 months to an IBM endorsement of the Lenovo-branded products," Loughridge said.

IBM, at your service

Leasing, financing, warranty and maintenance services will be provided by IBM Global Financing and IBM Global Services to Lenovo customers, he said.

IBM is getting out of the PC manufacturing business because it sees greater profits in the services market, Loughridge said.

"Our strategy is clear, to be the world-leader in high-value solutions," he said. The deal "helps IBM focus on enterprise and SMB (small and medium-size business) segments where we can best leverage our value-add," Loughridge said.

Since 2002, IBM has spent about $9 billion to acquire over 30 companies including Price Waterhouse Coopers Consulting. In the same period, it has divested several businesses where it lacks scale or market opportunities, such as its hard-disk drives and displays units.

Focused on the enterprise

"The PC business is rapidly taking on the characteristic of the home and consumer industry, which favours enormous economies of scale focused on individual users and buyers. This agreement continues IBM's strategic rebalancing of our portfolio on the high-value enterprise market," Loughridge said.

The headquarters of Lenovo's new PC business will be in New York and it will have major operations in Raleigh, North Carolina, in the and in Beijing. Stephen Ward, currently the senior vice president and general manager of IBM's personal systems group, will become CEO of Lenovo. Yuanqing Yang, currently vice chairman, president and CEO of Lenovo, will become chairman of Lenovo once the deal is completed.

Lenovo will have about 19,000 employees following the acquisition. Of these, about 10,000 are current IBM employees, of which about 4,000 are based in China.

The deal requires the approval of Lenovo shareholders and relevant regulatory authorities. Lenovo Holdings, Lenovo Group's largest shareholder, has already agreed to vote in favor of the transaction.