The purchase of the Think Pad PC line appears to have been a good strategic decision for both Lenovo and IBM. The acquisition happened in December of 2004 with an announcement of the finalization of the purchase agreement for $1.75 billion (Quelch and Knoop 1). During the time of the acquisition, Lenovo was a strong PC brand in China with two decades of experience in building and selling computers to the local market. IBM was a strong global brand but still tagging behind Dell and HP in the PC market and competing at par with other companies in its other areas of business (1).
Initially, there were concerns over the success of the acquisition especially because of low rate of success of mergers and acquisitions in the PC industry. Right after the acquisition, enhancing Think Pad was a good move while at the same time building the 3000 series under the Lenovo brand (12). Now, with the greater brand exposure of Lenovo supported by increased global sales, the company can justify its acquisition decision. For both companies, the acquisition proved to serve their respective business interests.
It was important for Lenovo to purchase the Think Pad PC line from IBM for the primary reasons of facilitating its international expansion. Lenovo was a known PC brand in China with the company holding a significant share of the market relative to other local and even foreign competitors (Quelch and Knoop 4). The company achieved this status by focusing on standard functioning PCs for small and medium businesses (4).
However, with competition increasingly growing fiercer in the domestic market and the widening opportunities for international expansion, the option for international expansion opened for Lenovo (4). The purchase of the IBM Think Pad PC line was a way for Lenovo to enter the international market. Lenovo achieves a number of benefits for internationalization from the acquisition. Read also C alifornia Choppers case study
First, Lenovo gains the already existing global market of the Think Pad PC line. As a company and brand not well known in the global PC market, the easiest and fastest way for Lenovo to gain a foothold in the international market is to acquire an existing market. The Think Pad PC line had a solid customer based around the world, especially in large enterprises (Quelch and Knoop 6). Concurrently, Lenovo can also retain the global distribution network of IBM to continue selling the Think Pad PC line but also its own products carrying its brand name (7). Establishing Lenovo’s own distribution network in different countries would take time and involve resources.
Second, the acquisition was the necessary step to the positioning strategy of Lenovo as an international brand. Lenovo needed to have a brand that it can use as a launch pad for introducing the Lenovo brand. Lenovo needed to make a big impact in achieving global brand awareness. IBM is a known and respected brand with enough influence to convince people to accept Lenovo since IBM entrusted its PC line to the company (Quelch and Knoop 8). Lenovo used IBM and the Think Pad brands to build the Lenovo brand. It helped that IBM provides systems support for Lenovo (6). This allayed the fears of consumers over the issues quality and reliability.
Third, Lenovo needed to establish a competitive advantage through a value proposition not only to introduce the Lenovo brand but also to differentiate itself from its strong global competitors. Lenovo sold standard products (Quelch and Knoop 10) similar to Dell. To gain an edge, the acquisition meant that Lenovo could now combine its production efficiency as its internal competency with the innovativeness gained from IBM (10). This way, Lenovo now has two product lines under two strong brands that allow the company to address the needs of the international market. The enhanced Think Pad PC line targets premium business consumers while the Lenovo 3000 series targets the small and business firms (23).
The sale of the Think Pad PC line was also important to IBM. The company developed as an innovative firm by introducing the PC concept. However, with heavy cloning and fierce competition in the computer industry (Quelch and Knoop 2), its PC line was no longer profitable enough. IBM wanted to focus on its strength on computer technology related services as a consulting firm (5) that matched its innovative strategic direction. The sale of its Think Pad benefitted IBM in a number of ways.
First, the company was able to gain capital to boost its consulting service. The sales agreement involved an outright payment of $650 million as outright cash, $600 million worth of shares, and assumption of IBM’s $500 million liabilities (Quelch and Knoop 5). This meant that not only does IBM have operating cash it also has interest in Lenovo, which could become profitable as Lenovo grows and expands internationally. This also implied that IBM was free of debt. This gave IBM freehand to invest further in its consulting services.
Second, by providing support services to Lenovo for five years (Quelch and Knoop 6) together with its shares, IBM can establish its consulting services to the business consumers that Lenovo can reach and acquire. In the long-term, the expected expansion of Lenovo means the growth in the market reach of IBM.
Third, the acquisition involved a non-competition agreement with Lenovo acquiescing not to compete with the consulting service of IBM (Quelch and Knoop 6). This is an advantage for IBM because it not only gained an ally or partner in the computer industry but also eliminated a potential competitor.
The acquisition or sale of the Think Pad PC line comprised a mutually beneficial move, which is rare in an industry with a tendency for cannibalization. By optimizing the benefits from this move, Lenovo can achieve its goal of international expansion and IBM can fulfill its goal of becoming a world leader in consulting services to the computer industry.
Quelch, John, and Carin-Isabel Knoop. Lenovo: Building a Global Brand. Boston, MA: Harvard Business School Publishing, 2006.
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