BEIJING (AP) – China’s biggest computer maker, Lenovo Group, said Wednesday it has acquired a majority stake in International Business Machines Corp.’s personal computer business for $1.75 billion, one of the biggest Chinese overseas acquisitions ever.

The deal shifts IBM to a peripheral role in a corner of the technology industry it pioneered.

It creates a joint venture in which Lenovo Group Ltd. takes over the IBM-brand personal computer business, including research and development and manufacturing, while IBM will keep an 18.9 percent stake in the company, said Lenovo’s chairman, Liu Chuanzhi.

The deal makes Lenovo the third-largest PC company in the world, he said.

Like other major Chinese manufacturers hoping to expand overseas, Lenovo is planning to leverage a well-known foreign brand name. Liu said the company would be entitled to freely use IBM’s brand name in five years’ time.

IBM’s computer unit had sales of nearly $13 billion over 12 months ended in September.

Lenovo, founded in 1984 by a group of scholars at the government-backed Chinese Academy of Sciences in Beijing, is China’s biggest computer maker and is also the biggest in Asia. Its shares are traded in Hong Kong.

The announcement Wednesday followed reports that a deal was imminent. On Tuesday, Lenovo’s Hong Kong unit confirmed it was in talks with a “major international company in the information technology business” but hadn’t named the company.

“The bigger the baby, the more difficult the delivery,” Liu quipped when asked about the delay in making a formal announcement.

With speculation about the impending deal mounting, IBM’s stock fell $1.57 per share to $96.10 in Tuesday’s trading on the New York Stock Exchange.

After the deal was announced, IBM executives sought to reassure jittery investors, customers and employees, emphasizing the company’s focus on continuity.

“The IBM brand will gain great recognition in China, the world’s fastest growing economy and the world’s fastest growing market for PCs,” said John Joyce, IBM senior vice president and group executive of IBM Global Services.

“For employees, this represents an opportunity to join a vibrant and growing company and for investors this agreement represents an opportunity to reap the rewards of a growing company in a growing market.”

Both IBM and Lenovo have been grappling with the difficulties of turning a profit on PCs, a business that has suffered steep price declines over the past decade thanks to aggressive competition from Dell and upstarts such as eMachines Inc., which was acquired earlier this year by Gateway Inc.

Once a key player in popularizing the personal computer, IBM is now increasing its focus on consulting, outsourcing and software, analysts say.

Its PC business now accounts for a small portion of its total sales and profits, according to analysts. It ranks a distant third in terms of PC units sold, having surrendered the market lead by the late 1990s, according to the technology research firm Gartner Inc.

Globally, IBM sold 6.8 million PCs in the first nine months of 2004 for a 5 percent market share, Gartner said. That compares with 16.4 percent for Dell Inc. and 13.9 percent for Hewlett-Packard Inc., which makes both the HP and Compaq brands.

The companies expect that by combining operations, they’ll be able to save money on manufacturing and expand their razor-thin profit margins.

Lenovo faces increased competition at home and in Asia from foreign companies such as Dell. The Beijing-based company, formerly known as Legend, had expanded into cell phone manufacturing and information technology services, with lackluster results. It now says it is focusing on its core computer business again.

IBM was not the first technology company to sell a computer small enough to sit on a desk or table. But it did popularize the idea of a “personal” computer for the mass market with the 1981 introduction of a desktop machine featuring a more user-friendly operating system, a software platform licensed from a then-fledgling company named Microsoft Corp.

IBM, based in Armonk, N.Y., has nearly 320,000 employees.

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AP Business Writer Bruce Meyerson in New York contributed to this report.

AP-ES-12-07-04 2207EST

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