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In confirming almost a week of speculation, IBM and China-based Lenovo Group Ltd. announced an agreement Tuesday night in which Big Blue will sell its PC division for about $1.75 billion.

The deal, which officials from both companies said will be completed in the second quarter of 2005, will make Lenovo the third-largest PC company in the world, behind Dell Inc. and Hewlett-Packard Co.

The deal creates a joint venture between Lenovo and IBM that will enable Lenovo, through the purchase of IBM’s Personal Computing Division, to rapidly grow its computer business beyond China. For IBM, the agreement will enable it to get out from under its PC business but still keep a hand in the game. IBM will buy 18.9 percent of Lenovo, which will become IBM’s supplier of ThinkCentre PCs and ThinkPad notebooks.

In addition, IBM, of Armonk, N.Y., will provide maintenance and financing services for the products. The new business will be headquartered in New York and will have about 10,000 IBM employees and 9,000 Lenovo workers.

Stephen Ward, vice president and general manager for IBM’s Personal System Group, will become CEO of the new entity, which will have about $12 billion in revenue. Current Lenovo CEO Yang Yuanqing will be president.

Jim Louderback says IBM’s PC retreat is good business. Click here to read more.

In announcing the deal, Mark Loughridge, senior vice president and chief financial officer, said the alliance will enable IBM to continue to offer PC products to its customers while also expanding into emerging markets, including China. At the same time, it will free up the company to focus more on higher-end computing products, such as servers.

“This agreement … continues IBM’s strategic rebalancing of our portfolio, on the high-value enterprise market segment,” Loughridge said. “It moves our PC business from an element in the IBM portfolio to a key element in IBM’s partner network. This partner network consists of business partners that IBM leverages to support its portfolio and integrated businesses. It extends IBM’s reach and capabilities in areas where IBM clients are better served with a partner.”

Lenovo will control the IBM brand for five years, and IBM will give marketing and sales support to Lenovo.

Analysts wonder if Lenovo knows what it’s getting itself into. Click here to read more.

Though it essentially created the PC market two decades ago, IBM over the past few years has been pulling back from its PC business. It sold its hard drive business to Hitachi Ltd., and Sanmina-SCI now manufactures its desktop and notebooks.

The move also continues the consolidation in a segment of the IT industry that is becoming increasingly commoditized. Earlier this year, Gateway Inc. bought eMachines Inc., a highly-successful supplier of low-end systems.

In a recent report, analyst firm Gartner Inc. predicted further consolidation, expecting several of the top 10 current PC players to fall by the wayside over the next few years.

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