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Shortly before IBM announced the end of an era, its China employees gathered in the conference room of the firm's Beijing office. There, company officials told them that IBM, which practically invented personal computers, would sell its PC unit to a Chinese competitor, Lenovo (formerly Legend). The 60 or so attendees learned that, upon joining Lenovo, they would become the backbone of the world's third biggest computer maker. Hours later, a proud headline in the online edition of the People's Daily summarized the $1.25 billion deal: "China's IT Industry Has Stood Up." Yet the mood in the room was short on euphoria. "People cried," says a senior manager who was there. "The bosses made it sound like a victory, but it's a big gamble on an uncertain future."

Those employees aren't alone in worrying about China's new overseas business adventures. A small but growing number of firms are trying to claw their way into world markets by buying foreign companies. Last year, Guangdong-based TCL bought the television arm of French electronics behemoth Thomson, which gave it the RCA brand. Shanghai Automotive Industry Corp. is in talks to acquire the very English MG Rover, and has already bought Korean SUV maker Ssangyong. A consortium of Chinese companies bid on the Canadian mining firm Noranda. According to a recent study by Bain & Co., China's foreign investments will reach $86 billion by 2015. These global ambitions have generally been encouraged by the government, with Minister of Commerce Bo Xilai last month urging the nation to "reinforce our invest-abroad strategy."

Yet the move overseas is less of an invasion than an escape. China's strongest companies produce relatively low-tech consumer products like TVs, cell phones and computers—businesses in which the mainland market is now so competitive that it's increasingly tough to turn a healthy profit. Since China joined the World Trade Organization in 2001, tariffs have plunged and foreign rivals have swarmed the country, forcing domestic firms to cut their prices. Although China's economy is still booming, prices for consumer goods actually fell 1% through October this year. Lenovo, which has been under threat domestically from Dell, has seen gross margins from its corporate PC business fall from 14.8% last year to 12.4% in the second quarter of this fiscal year. "Chinese are buying foreign companies out of desperation because of shrinking margins at home," says Arthur Kroeber, managing editor of China Economic Quarterly. "It's not a silly gamble, but it is high risk."

Chinese companies have felt the thrill of shopping abroad before—and have later come to regret it. The first celebrated takeover came in 2001, when cell-phone designer Holley Group bought a NASDAQ-listed Californian company called American Champion Entertainment. Only later did the Chinese learn that American Champion's assets amounted to little more than a children's TV show called Adventures with Kanga Roddy. Chinese firms today still aren't rich enough to buy top-flight companies, but they do have money to spend. Lenovo earned $135 million in its last fiscal year on revenues of $3 billion, giving it the heft and confidence to believe that it's ready to compete on an even larger scale.

Lenovo began modestly. Launched in 1984 out of a concrete bungalow, Lenovo quickly grew into China's biggest computer company, commanding just over a quarter of the domestic market today. In 2001, IBM offered to sell its PC unit to Lenovo, but the Chinese firm wasn't interested. It instead launched new lines of handheld devices and corporate services that it thought would drive profits for a decade. Last year, however, those enterprises had a loss of $29 million. The company then reversed tactics and went down-market with "village computers" selling for $350 a pop. But that didn't work either—overall sales in the second quarter fell nearly 10%. At the same time, Dell's market share in China has nearly doubled in three years to 7.3%, with sales almost exclusively to wealthy corporate clients and government agencies. Just last month, the Ministry of Education switched from Lenovo to Dell in a $20 million deal, according to two Dell executives.

Squeezed in China, Lenovo finally began talks with IBM, and an all-night negotiating session ended last Wednesday morning when the head of the Lenovo team sent a text message reading, "Everything is O.K.," to CEO Yang Yuanqing. Yang quickly approved a deal that gives Lenovo ownership of one of the world's most trusted brands. For the next 18 months, household-name products like ThinkPad will carry IBM's name. After that they'll switch to both the Lenovo and IBM brands, and in five years "there will be no more IBM personal computers," says Yang, who will leave his post to become chairman. Lenovo has already begun promoting its own brand name—a task made easier by its sponsorship of the 2008 Beijing Olympics. As for IBM, the deal with Lenovo looks like a boon. The company, which retains a 19% stake in Lenovo, has long migrated toward consulting services and software, so it's happy to jettison its hardware shop. The PC unit experienced a loss of $258 million last year and has debts of $500 million—problems that now fall to Lenovo.

It's also worth noting that few of the Asian firms that have succeeded overseas bought their way there. Japanese automakers Toyota and Honda enjoyed years of protected markets at home, then set up operations abroad that introduced new production techniques or superior engineering. In Korea, Samsung and Hyundai took decades to build respected brands. By contrast, electronics maker LG failed to establish a thriving business from its shortcut purchase of the TV brand Zenith—though it has recently been much more successful in penetrating global markets by pushing its own brand. Chinese acquirers will face similar challenges. TCL has yet to explain how it will turn around money-losing Thomson, which sells old TV models, and boardroom squabbles with its new French executives threaten to upset the venture. "We don't have much fun in Paris anymore," says an aide to Li Dongsheng, TCL's chairman. Shanghai Automotive, for its part, hopes that its Rover purchase will compensate for its troubles at home, where Shanghai Automotive has had to cut prices on its top-selling Santana—the product of a joint venture with Volkswagen—by 30% this year.

To be fair, Lenovo does gain some benefits from its foray abroad. Lenovo's new CEO will be the highly regarded IBM veteran Stephen Ward, who will steer the business from Lenovo's new headquarters in Armonk, New York—a convenient location from which to target the U.S. market. The breadth of Lenovo's product line will improve, too: it will offer clients IBM's upscale laptops, in addition to its own line of cheap desktop computers. And then there's the IBM name. "They are going to ride the coattails of the IBM brand," says Bryan Ma, a Singapore-based analyst at consulting firm IDC. "Nobody outside of China knows who Lenovo is."

In the long run, Lenovo wants to turn its own name into a glamorous brand. But if its image in China is any indication, that'll prove tricky. Li Yong, a 35-year-old technician, spent last Friday shopping for an IBM ThinkPad in Beijing. It will be his third, and probably his last. "IBM's laptops are the most stable in the world. I won't take the risk of buying one with Lenovo technology." Lenovo will soon have to make the rest of the world think otherwise.

• Matthew Forney | Beijing
• Squeezed at home, China's biggest computer maker, Lenovo, is buying IBM's money-losing PC business. But venturing abroad is fraught with risk