Losses forced IBM to abandon retail PC sales in 1998. In 2002 it sold off its PC factories and hired contract manufacturing to build the boxes it continued to sell to its corporate customers.

Lenovo is getting the $10 billion operation, the equivalent of roughly 10% of IBM revenues, on the cheap.

IBM will get $650 million in cash and roughly $600 million in Lenovo stock, amounting to an 18.9% stake in the company. The Chinese government will have 46%.

Lenovo, which only has $400 million in the bank, will also pick up the unit's $500 million debt.

The way the deal is structured Lenovo will get IBM's designs, its PC R&D arm and all its PC people starting with IBM Personal Systems Group general manager Stephen Ward.

Ward will be CEO of Lenovo and report to Lenovo's current CEO Yang Yuanqing, who will be chairman.

So the deal won't totally spook IBM's corporate customers, who might not be thrilled at the prospect of buying Chinese boxes, Lenovo will get to use the IBM logo for next five years and will own the "Think" brand.

It will phase in the switch to the Lenovo brand in stages, starting with the IBM name only, then IBM-Lenovo in 18 months, then Lenovo with a tag credit line for IBM in three-and-a-half years.

As an additional assurance, Lenovo will be IBM's preferred PC supplier and fill Big Blue's presumably large internal PC requirements.

Wily old IBM will keep the services and financing part of the business, and provide marketing and demand generation services for Lenovo. It'll get paid for its warranty support and lead generation. In return, Lenovo will get a sales fee for selling IBM financing and support.

The creation of the new entity, headquartered in New York with operations in Beijing and Raleigh, North Carolina, will catapult the 20-year-old Chinese company into being world's third-largest PC vendor after Dell and Hewlett-Packard, albeit a distant third with 5.6% of market.

Dell owns 16.4% and HP 13.9%. Lenovo on its own has maybe 2% or 3%, almost all of it Chinese.

IBM and Lenovo were reportedly in serious talks for the last 13 months at Lenovo's instigation. Earlier this year an evidently confident Lenovo changed its name from Legend Computers as part of its anticipated new globalization push.

The IBM piece gives $3 billion-a-year Lenovo, China's biggest PC maker, its first real reach outside of Asia after an initial attempt failed two years ago.

Based on 2003 results, it could have combined annual PC revenues of $12 billion and volume of 11.9 million units.

Lenovo, which also sells servers and cell phones, targets both the consumer and the enterprise and its revenues have reportedly grown in the double-digits over the last five years.

However, in the last two years it's been losing ground in China to nimbler multinationals like Dell, the only major PC player to be consistently profitable. Lenovo now controls ~27% of its home market.

Amazingly, according to the Wall Street Journal, Dell's cost structure in China is lower than Lenovo's.

To fight back its Western rivals - including IBM, which is reportedly the fastest-growing brand in China - Lenovo has restructured, cut prices and people and started selling directly to some enterprise accounts just like Dell.

Of course, the Chinese government could always step in, as it habitually threatens to do, and severely restrict foreign vendors. Otherwise, Lenovo has bitten off a mighty big piece and could easily choke on it.

It's under fire at home. It's going to have to absorb an alien culture. It's incurring debt. It has no international experience. It apparently has no China-infused natural cost advantage. It'll be run by the same guys who weren't able to squeeze the costs out before. It's not an innovator. And it could easily lose IBM's clientele and resellers. Forrester Research claims the deal could put 14 million American PCs up for grabs and doubtless Dell and HP have been manning the phones all week. What's more the PC market is supposed to go into stagnation starting next year.

Not to mention joint ventures rarely work.

On the other hand, if Lenovo succeeds, it could upset the entire computer landscape, giving China an important landfall in the West. Predictably none of the commentariat has bothered to ask whether the sale is inherently dangerous to Western interests. Wall Street analysts merely figure it means IBM will gain five cents a share.

IBM itself reckons its gross margin will improve by three points.

More immediately, both Dell and HP could be at risk depending on how Lenovo proceeds. It could kick off a dandy little price war.

The deal of course rids IBM of a business that has lost hundreds of millions of dollars, perhaps even billions, and has rarely been in the black since IBM surrendered its hegemony in PCs in 1994.

IBM CEO Sam Palmisano, who negotiated with Lenovo himself, sees the deal, which saws off quite a little chunk of revenue, as strengthening IBM's "focus on the enterprise" and its "ability to capture the highest-value opportunities in a rapidly changing information technology industry."

Presumably he also figures it will give IBM's servers and service a privileged status in China, which is currently teetering on the brink of becoming the second-largest computer market after the US. In five years it is supposed to be the third-largest economy in the world.

Interesting enough, in October Lenovo sold its IT service business to software and solutions provider AsiaInfo Holding Inc for $36.3 million in stock.

The PC transaction continues IBM's strategy of the last few years of focusing on higher-margin services, software, servers and storage, a policy that has seen it sell off other unproductive operations like printers (Lexmark), thin clients (Neoware) and hard drives (Hitachi).

"Overall, the businesses ultimately did better where they landed," IBM CFO Mark Loughridge remarked.

In explaining its decision IBM struck something of a post-PC pose and mumbled something about consumer electronic devices and its anticipated Cell chip.

IBM doesn't expect much impact its results this quarter but it projected a pre-tax gain of $900 million-$1.2 billion after the deal closes in the second quarter.

"Over time, this action will improve IBM's financial profile, with less revenue volatility and improved profit margins," Loughridge said on a conference call Tuesday night.

As part of the deal, IBM's PC manufacturing operation in Shenzen goes to Lenovo but not the xSeries server manufacturing it has at the same location. That plant is a joint venture with Great Wall Technology, another Chinese national and Lenovo rival.

It remains to be seen how IBM's contract manufacturer Sanmina-SCI fares in the transaction. Since Lenovo has no factories in North America and Europe, it may renegotiate the Sanmina contract, which expires in January 2006. Of course, it may not offer favorable terms or could take its business elsewhere.

Sanmina also makes IBM servers and was knocked for a near-fatal loop when it acquired SCI in 2001 requiring prolonged restructuring. It currently realizes about 15% of its business from IBM PCs, worth about $1.5 billion in revenues.

Piper Jaffray says Sanmina management plans to visit Lenovo in the next month.

Following the deal, Lenovo will have 19,000 employees, 10,000 of them from IBM. Of those 10,000, 40% are in China and 25% in the US. Wonder if layoffs are in the cards?

IBM's long-term participation in the company depends on Lenovo's performance. The stock it's getting is subject to lock-ups expiring in three years. IBM said, "We will evaluate this investment upon release of the lock-ups."