Chapter 13 Survival of the fittest within Section 6
If you look at IBM's performance in the past five years, you will find that IBM's annual revenue has only increased by 13% (from 81 billion to 91 billion) in the past five years, while its profits have increased by 4 times (from 2.3 billion to 9 billion). five hundred million).The reason is that IBM continues to eliminate departments that do not make money or make little money, and expand departments with high profits. In 2002, IBM sold its unprofitable hard drive division to Japan's Hitachi for $3 billion. At the end of 2004, IBM sold its notebook computer division to China's Lenovo for 1.75 billion.Among them, 1.25 billion is a cash transaction (paid by Lenovo to IBM), and the other 500 million is Lenovo's 19% equity exchange.In other words, at the time, IBM believed that Lenovo was worth $2.6 billion.IBM has similarly sold divisions before.
Let's ignore the deal between IBM and Hitachi, let's take a look at the deal between IBM and Lenovo, because this is the first time a Chinese company has acquired a division of a famous American company.At that time, many people thought that Lenovo's acquisition of IBM's notebook business meant that China's national strength had increased, and they were proud; some people worried whether Lenovo could absorb the IBM business because it was losing money.Obviously, this business can be done because IBM has a reason to sell, and Lenovo has a reason to buy.
I don't have data on Lenovo's operations over the years, but I have IBM's financial reports over the years.Let's take a look at IBM's situation first.The table below is my summary from IBM's annual filing with the SEC.Many of these small items, such as one-time income and expenses, etc., I have omitted.
From the table, we can see that after selling the notebook department, IBM's total revenue decreased slightly, but the profit increased significantly because the cost dropped significantly.Management, market development, R&D and other expenses were basically the same.Profit after tax has increased by more than a quarter.After selling the laptop division, IBM used the cash to repurchase its own stock several times, so the total number of shares in the company decreased, and the increase in profit per share was significantly faster than the increase in after-tax profit.Obviously, IBM got rid of a burden by selling its loss-making notebook division, and at the same time it was able to focus on its services business, which greatly improved profits and rewarded investors.
So, did Lenovo lose money by buying IBM's notebook division?Although I haven't seen Lenovo's revenue in recent years, I think Lenovo's decision back then was very correct.There are two reasons that all the people at that time have seen.First, IBM Thinkpad is the No. 1 brand of notebook computers. If Lenovo buys this brand, it can directly sell its own brand of computers around the world instead of assembling machines for American and Japanese companies.Sometimes, even if you spend a lot of time and money, you may not be able to create a world-class brand.Lenovo got it right this time.Second, Lenovo's notebook computer sales in the world market at that time were only 2%. This market share was insignificant and could not compete with companies such as Dell and HP.At that time, IBM had a 5% market share, and the two together accounted for about 7%. This share can be ranked among the top five in the world, and it can compete with American and Japanese companies.Of course, almost everyone has a question whether Lenovo can turn around IBM's loss-making notebook division.
Doing some analysis and research on the notebook industry, it can be seen that this possibility is very large.I think the reason why Lenovo is willing to acquire must be to see this after thinking twice.In fact, IBM's notebook division's gross profit is about a quarter, far greater than Dell's 19 percent and HP's 23 percent.However, IBM notebooks are losing money, and HP still has about 7% of after-tax profits. The main reason is that IBM's non-productive costs, that is, management, marketing and R&D expenses are too high, accounting for 27% of total revenue. In terms of finance, IBM distributes these expenses across the company equally to various departments. Except for notebooks, IBM's other departments have a gross profit of more than 40%. After deducting non-productive costs, they are still very profitable.However, the notebook division became loss-making. It is very difficult for IBM to reverse the loss situation of the notebook department, because the entire company is so profitable that it has no habit of careful calculation when it falls from top to bottom.However, it should be easy for Lenovo to turn losses into profits, because labor in China is cheap, and it is easy to reduce management and R&D costs.No matter how bad it is, Lenovo's non-productive costs can't be higher than HP's.Generally speaking, this transaction between IBM and Lenovo should be a win-win situation.
This is how IBM adjusts its internal structure from time to time, sells some non-core departments with low long-term benefits, and expands core businesses with high profits.
From the table, we can see that after selling the notebook department, IBM's total revenue decreased slightly, but the profit increased significantly because the cost dropped significantly.Management, market development, R&D and other expenses were basically the same.Profit after tax has increased by more than a quarter.After selling the laptop division, IBM used the cash to repurchase its own stock several times, so the total number of shares in the company decreased, and the increase in profit per share was significantly faster than the increase in after-tax profit.Obviously, IBM got rid of a burden by selling its loss-making notebook division, and at the same time it was able to focus on its services business, which greatly improved profits and rewarded investors.
So, did Lenovo lose money by buying IBM's notebook division?Although I haven't seen Lenovo's revenue in recent years, I think Lenovo's decision back then was very correct.There are two reasons that all the people at that time have seen.First, IBM Thinkpad is the No. 1 brand of notebook computers. If Lenovo buys this brand, it can directly sell its own brand of computers around the world instead of assembling machines for American and Japanese companies.Sometimes, even if you spend a lot of time and money, you may not be able to create a world-class brand.Lenovo got it right this time.Second, Lenovo's notebook computer sales in the world market at that time were only 2%. This market share was insignificant and could not compete with companies such as Dell and HP.At that time, IBM had a 5% market share, and the two together accounted for about 7%. This share can be ranked among the top five in the world, and it can compete with American and Japanese companies.Of course, almost everyone has a question whether Lenovo can turn around IBM's loss-making notebook division.
Doing some analysis and research on the notebook industry, it can be seen that this possibility is very large.I think the reason why Lenovo is willing to acquire must be to see this after thinking twice.In fact, IBM's notebook division's gross profit is about a quarter, far greater than Dell's 19 percent and HP's 23 percent.However, IBM notebooks are losing money, and HP still has about 7% of after-tax profits. The main reason is that IBM's non-productive costs, that is, management, marketing and R&D expenses are too high, accounting for 27% of total revenue. In terms of finance, IBM distributes these expenses across the company equally to various departments. Except for notebooks, IBM's other departments have a gross profit of more than 40%. After deducting non-productive costs, they are still very profitable.However, the notebook division became loss-making. It is very difficult for IBM to reverse the loss situation of the notebook department, because the entire company is so profitable that it has no habit of careful calculation when it falls from top to bottom.However, it should be easy for Lenovo to turn losses into profits, because labor in China is cheap, and it is easy to reduce management and R&D costs.No matter how bad it is, Lenovo's non-productive costs can't be higher than HP's.Generally speaking, this transaction between IBM and Lenovo should be a win-win situation.
This is how IBM adjusts its internal structure from time to time, sells some non-core departments with low long-term benefits, and expands core businesses with high profits.