China minnow in shock IBM move

SHARES in little-known Lenovo were suspended in Hong Kong today, fuelling speculation that the Chinese computer firm is on the verge of buying IBM's personal computer business.

Analysts have reacted with incredulity to reports that IBM would exit the business it helped pioneer in the 1980s.

If sold, the business is expected to fetch some $2bn (£1.09bn), although IBM has refused to comment on the speculation.

Its exit would mark the end of an era. While 'Big Blue' has slipped to third in volume shipments behind Dell and Hewlett-Packard, its huge enterprise customers like to see the IBM brand on their hardware and the unit is profitable.

But analysts admit the PC business is not strategic to the longterm ambitions of chief executive Sam Palmisano.

PC sales profit margins are tiny compared with IBM's new focus, computer services. That trend away from PCs was begun by former chief executive Lou Gerstner, largely credited with reviving the firm's fortunes in the 1990s.

Lenovo, founded as a distributor in 1984, refused comment on any impending deal, apart from its request for a trading pause pending price-sensitive information.

The company has risen largely without trace in Western eyes but has become the world's eighth-largest-PC vendor by domestic sales. It now has 2% of the global market, compared with IBM's 5.65% and market leader Dell's 17%.

The group last month posted a first-half net profit of HK$627m (£43.5m) with earnings up 16%.

Some analysts believe a joint venture with Big Blue is more likely than an outright sale.

Roger Kay, an analyst with researcher IDC, said such a deal with Lenovo or another low-cost manufacturer was likely.

'If it's sold outright, then IBM would have no control,' Kay said. 'If it's a joint venture and run by some IBM people, then IBM can guarantee the evenness of experience. I'm kind of voting for that.'

Merrill Lynch analyst Steven Milunovich also said quality-control issues would worry corporate clients should IBM exit completely.

'We think IBM may still want to distribute an IBM-branded PC. In other words, Lenovo could provide a PC that says IBM on the front,' Milunovich wrote to clients. But all agree IBM is not as committed to the market as it once was.

In 2002, Big Blue signed a $5bn, three-year agreement to outsource most of its desktop PC production to Asian contract manufacturer Sanmina-SCI. Last month, researcher Gartner said the PC business was in for three lean years and expected three of the top 10 global manufacturers to disappear through consolidation.