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Will Lenovo Score Another Deal at IBM's Garage Sale?

April 22, 2013

In IBM's Scraps, Lenovo Finds Treasure for Emerging Markets

Lenovo Group Ltd. computers being transported in Beijing, China. Photographer: Nelson Ching/Bloomberg

It's a cycle of life in the technology world: one company's fading business is another company's emerging market opportunity.

Such was the case in 2004 when IBM wanted to unload its personal computer business, which was facing falling prices and evaporating profits. The Armonk, New York-based company found a buyer in Beijing's Lenovo Group, then a marginal player. Today it's a PC giant.

Here we go again. Maybe.

Big Blue could soon sell its low-end server division to Lenovo, as Bloomberg News reported. The business has low margins and low growth, and IBM executives have been downplaying its importance for years.

Still, the servers are popular among Internet companies for their low cost and simplicity of use. And given that Lenovo resides in the most-populous and most-Internet-connected country in the world, this anchor around IBM's neck could turn into a gold necklace for the Chinese company.

We know how well the strategy worked the first time.

Before Lenovo bought IBM's PC unit, it had less than 3 percent of the global market, according to IDC analyst David Daoud. In the year after the deal closed, it had a 7 percent market share. And last year, Lenovo accounted for 15 percent of the market, trailing only Hewlett-Packard.

For a company that got more than half its $29.6 billion in revenue last year from China and emerging markets, according to Bloomberg data, the numbers show that Lenovo's deep reach in developing countries is helping expand the number of people using PCs. And that comes at a time when the industry faces a growing threat from smartphones and tablets.

Now, if Lenovo is successful in buying IBM's x86 server division - as my colleagues Jeffrey McCracken, Sarah Frier and Edmond Lococo reported - we could see the same cycle repeat.

There's a catch, though. The metabolism of the technology industry has sped up, and Lenovo might one day soon find itself in IBM's shoes.

Few in Silicon Valley can forget Hewlett-Packard's bitterly disputed acquisition of PC maker Compaq Computer during the dot-com boom. It helped make HP one of the biggest companies on the planet, with more than $100 billion in annual revenue. But HP has since fallen on hard times, in no small part because of the resources needed to sustain the PC division, which HP publicly mulled selling.

Pay attention, Lenovo. Betting on declining computer markets may help lift your fortunes, but it's a dangerous game that companies have lost before. The tricky part about the cycle of life is making sure it doesn't end with you.

This story was first published in Bloomberg's Global Tech Today newsletter. To get an early jump on the most important tech news from around the world, sign up for the free weekday report.


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