Lenovo to buy IBM's low-end server business for $2.3 billion

Thursday 23 January 2014 18.14
Deal will help Chinese firm diversify away from the slumping PC-sales sector
Deal will help Chinese firm diversify away from the slumping PC-sales sector

Lenovo Group has agreed to buy IBM Corp's server business for $2.3 billion as the Chinese PC giant grabs another piece of the computing world in a long-awaited deal.
              
The acquisition comes nearly a decade after Beijing-based Lenovo bought International Business Machines's (IBM) loss-making ThinkPad business for $1.75 billion.

It eventually became the world leader in personal computers in 2012.
              
But with the PC business now under siege in the face of powerful smartphones and super-fast tablets, Lenovo is diversifying its revenue and remodelling itself as a force in mobile devices and data storage servers.
              
 

The acquisition of the IBM unit, still subject to approval from the Committee on Foreign Investment in the US would lift Lenovo's market share in the server market to 14% from 2% currently. 

Before that happens, Lenovo has to turn the server unit around. The low-margin business - which sells less powerful and slower x86 servers than IBM's other higher-margin offerings - has posted seven quarters of losses as more clients switch to cloud storage from traditional infrastructure.
              
Analysts say Lenovo will likely find it easier than IBM to sell the x86 servers to Chinese companies as Beijing tries to localise its IT purchases in the wake of revelations about US surveillance.
              
Lenovo said it expects demand for computing power and recovery of global enterprise spending to further drive growth in the x86 server market.
              
Lenovo has agreed to pay $2.07 billion in cash and the rest with stock of the Hong Kong-listed PC maker, in a deal set to be China's biggest-ever technology M&A.
              
The deal surpasses Baidu's $1.85 billion acquisition of 91 Wireless from NetDragon Websoft last year, according to Thomson Reuters data, and underscores the growing clout of the country's technology firms as they look to expand overseas.
              
For IBM, the sale allows the company to focus on its decade-long shift to more profitable software and services.

The unit posted a $26.4m loss after tax for the 12 months ended December 31, compared with a $187m profit in the 12 months ended March 2013.

Talks between IBM and Lenovo fell apart last year due to differences over pricing, with media reports at the time suggesting IBM wanted as much as $6 billion for the unit.
              
Analysts said the sale may have been accelerated by IBM's China woes and ongoing weakness in hardware sales, after theworld's biggest technology services company reported a 23% drop in fourth-quarter revenue from China on Tuesday.
              
Lenovo's purchase of IBM's PC business in 2005 became the springboard for its leap to the top of global PC maker rankings,and the market is betting Lenovo will enjoy similar success with its latest acquisition, which is partly reflected in a 9.44% rise in its shares this year. 

IBM's server business was the world's second-largest, with a 22.9% share of the $12.3 billion market in the third quarter of 2013, according to technology research firm Gartner.
              
Hewlett-Packard Co is the biggest player, while Lenovo does not appear in the top five.
              
"The acquisition presents a unique opportunity for the company to gain immediate scale and credibility in this market, " Lenovo said in a statement today.