Note: The Skinny blog is written by Rick Smith, editor and co-founder of WRAL Tech Wire and business editor of

RESEARCH TRIANGLE PARK, N.C. – IBM’s $1.75 billion sale of its PC division, which was based primarily in the Triangle, to China-born and grown Lenovo seven years ago was a strategic move both financially and politically.

So said IBM (NYSE: IBM) Chairman Sam Palmisano in an interview published in The New York Times over the weekend. Palmisano stepped away from his chief executive officer role as of Jan. 1, replaced by Virginia Rometty. But in one of his biggest decisions as CEO he championed the sale of the PC group.

In Lenovo as a buyer, Palmisano told The Times he saw two benefits:

• Ridding Big Blue of a division for which he saw limited future value, especially in areas for innovation

• Gaining political leverage in China, which at that time and now continues to have a growing economy embracing technology.

By saying no to other potential bidders, Palmisano said he would curry favor with Chinese Communist Party leaders.

“In 2004, IBM sold its PC business to Lenovo of China. Mr. Palmisano says he deflected overtures from Dell and private equity firms, preferring the sale to a company in China for strategic reasons: the Chinese government wants its corporations to expand globally, and by aiding that national goal, IBM enhanced its stature in the lucrative Chinese market, where the government still steers business,” wrote Steve Lohr.

Palmisano’s comments offer insight into the Lenovo deal such as why U.S. private equity firms were part of the initial buy and IBM remained a shareholder in the Lenovo venture. Since then, IBM has dumped its shares.

As part of Lenovo’s $1.25 billion cash and $500 million in debt assumption acquisition of IBM’s PC business, IBM bought 15 percent of the Chinese computer maker in a deal that closed in mid-2005. Big Blue sold the last of its shares in early 2011.

Meanwhile, Lenovo has gone through various reorganizations and changes in management, implemented new strategies, accelerated product development and grown into the world’s No. 2 PC firm. It trails only HP, having passed Dell and Acer last year.

Palmisano told Lohr he saw big changes coming in the technology industry such as what is now called cloud computing and that the future was services and software, not hardware.

“So Mr. Palmisano led a lengthy strategic review of the PC business, deciding to sell while it was still profitable,” Lohr wrote. “Internal arguments against a sell-off were intense: PCs pulled in sales of other IBM products in corporate accounts, the cost of electronic parts for its larger computers would jump without the purchasing power of its big PC division, and the corporate brand and its reputation would suffer without PCs, the one IBM product touched by millions of people.”

Palmisano said he dismissed those arguments.

“I’ve heard every one of the arguments, every one of them,” Mr. Palmisano says. “But if you decide you’re going to move to a different space, where there’s innovation and therefore you can do unique things and get some premium for that, the PC business wasn’t going to be it.”

Lohr noted that the sales of the PC and other hardware groups dropped IBM from No. 1 as the world’s top technology firm, replaced by HP. HP and Dell are both moving aggressively into software and services. HP even planned to sell its PC group before a change in management put Meg Whitman in charge.

Palmisano is obviously proud of his strategic moves.

“You see the choice that was made, and how the economics worked out,”he told Lohr.
Lohr pointed out: “Today, I.B.M.’s stock market value, at $217 billion, is more than four times that of the struggling H.P.”

And to close a very strong 2011, IBM drew a huge investment from Warren Buffett, who praised Big Blue’s strategic vision.

Read the full New York Times interview here.

LENOVO ARCHIVE: Check out eight years of Lenovo stories as reported in WRAL Tech Wire by clicking here.]

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