IBM's PC sale puts the heat on HP

IBM's selling off of its PC division marks a milestone in the company's history and accelerates its move to become a service company, according to industry analysts.

The deal may not seem like good value at first - $1.75bn for a division that turns over $10bn a year - but IBM's profit margins will be boosted by releasing this loss-making part of its business.

It also leaves the company free to pursue its high-end hardware and consultancy services, and its open source operations.

The deal will also cause major changes in the PC industry, according to analyst firm Ovum. Margins on PCs are already tight, and Lenovo is in a good position to use its Chinese manufacturing base to cut costs.

"This will not have a huge effect on Dell as its state-of-the-art supply chain business cuts its costs," said Ovum analyst Philip Carnelley.

"HP will have the most pressure as it has to justify its full service computer operation. But if IBM can't make it work, you have to ask what HP is going to do that's any better."

Lenovo is virtually unknown outside Asia and now has the opportunity to attack the world's number one and two PC producers, Dell and HP, using IBM's international salesforce.

The deal represents one of the largest overseas acquisitions for the Chinese IT sector, but more are to be expected.

"You have only to look at the phenomenal success of Acer to see the power of the Chinese IT industry," said Ian Gibbs, senior research analyst at IDC.

"We will see more south east Asian vendors, like Asus maybe, increasingly coming after western business in the next few years.

"These guys have been manufacturing equipment for the top-tier vendors and have learned the process and can compete in what is now a commodity market."

Lenovo has licensed the IBM brand, once valued at over $1bn, for five years. Gibbs predicted that the firm may try slowly to introduce its own brand or attempt a dual-brand strategy like NEC/Packard Bell.