Lenovo to acquire IBM's low-end server business for US$2.3bln

Updated: 2014-01-27
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Lenovo Group Ltd has agreed a US$2.3 billion deal to acquire International Business Machines Corp's low-end server business. [qq.com]
Lenovo Group Ltd has agreed a US$2.3 billion deal to acquire International Business Machines Corp's low-end server business, the world's No. 1 personal computer maker announced yesterday.

If the deal goes through, it will be the company's biggest acquisition to date.
The deal still needs government approval on both sides, including the Committee on Foreign Investment in the United States. Analysts said it often rejected Chinese investment on the grounds of national security.

According to industry insiders, the deal would help Lenovo, which acquired IBM's PC business in 2005, to improve its technological level and profit margin.

They said it made sense at a time when the PC industry was facing declining sales.

The price includes around US$2 billion in cash and the rest in Lenovo stock, the companies said in a joint statement.

The acquisition would lift Lenovo's market share in the server market to 14 percent from 2 percent currently, Reuters reported, citing Peter Hortensius, senior vice president at Lenovo and president of its Think Business Group.

The deal, if approved, will be China's biggest technology merger and acquisition, surpassing Baidu Inc's US$1.85 billion purchase of 91 Wireless from NetDragon Websoft Inc last year, according to Thomson Reuters.

For IBM, the sale allows the company to focus on its decadelong shift to more profitable software and services.

"What the business is worth to IBM is no longer relevant. The only thing that matters is what it's worth to Lenovo,” Alberto Moel, a Hong Kong-based analyst at Sanford C. Bernstein, told Reuters. “If Lenovo can improve the margins ... that could offset any continued revenue shrinkage.”

Last year, both sides failed to agree on a price for the assets, estimated to be worth between US$2.5 billion and US$4.5 billion. Media reports had said IBM wanted as much as US$6 billion back then.

The purchase of IBM's x86 server business includes System x, BladeCenter and Flex System blade servers and switches.

Yang Yuanqing, Lenovo's chief executive, said in June that the company aimed to expand the company's share of the global server business to between 5 and 10 percent within the next three years from around 2.6 percent. 

"We are confident that we can grow this business successfully for the long term,” Yang said.

IBM was the third-largest vendor of x86 servers in the third quarter, trailing Hewlett-Packard and Dell Inc, according to US-based research firm International Data Corp.

Analysts said the sale may have been accelerated by IBM's China woes and ongoing weakness in hardware sales, according to Reuters, after the world's biggest technology services company reported a 23 percent drop in fourth-quarter revenue from China on Tuesday.

When Lenovo bought IBM's PC business for US$1.25 billion in 2005, Lenovo, then the world's No. 8 PC maker, jumped into third.

It became the world' top PC maker last year, after buying control of Germany's Medion AG and NEC Corp's PC division in Japan.

Yang is always scouting opportunities to expand beyond the core PC business and his PC Plus strategy has pushed Lenovo's expansion into smartphones and TV as well as storage equipment and servers.

Of the top-five PC vendors, Lenovo and Dell Inc have increased sales while those of Hewlett-Packard, Acer Group and Asus declined in the fourth quarter, a seventh-straight quarterly decline in global PC sales, according to US-based research firm Gartner Inc.

Worldwide PC sales totaled 82.6 million units in the fourth quarter, a 6.9 percent decline from a year earlier.

At the end of last year, Lenovo had an 18.1 percent market share of the global PC market.
SOURCE: china.org.cn
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