Lenovo in main frame for IBM's server unit

PUBLISHED : Friday, 19 April, 2013, 10:25am
UPDATED : Saturday, 20 April, 2013, 2:49am

Lenovo Group, the Chinese personal-computer maker, had emerged as the most likely bidder for International Business Machines' low-end server business, a person familiar with the matter said.

The division, which sells servers running x86 processors, might fetch US$2.5 billion to US$4.5 billion, depending on what assets and liabilities are included, the person said. An agreement might still be several weeks away, the person said.

A deal with Lenovo would build on IBM's sale of its personal computer unit to the Beijing-based company in 2005. Lenovo used that acquisition as a stepping stone to become the second-largest personal computer maker in the world, behind Hewlett-Packard. The company was the only top-five manufacturer not to see a drop in shipments last quarter, according to research firm IDC.

The server business, a drag on IBM's results, could be a "good fit" at Lenovo, said Laurence Balter, an analyst at Oracle Investment Research. The servers' x86 chips are similar to the processors used in personal computers.

"It's underperforming because of the cost of doing business on IBM's side," he said.

"Lenovo probably did the calculations and said, 'Well, we can make more because IBM's cost of doing business is so much higher."

The talks were previously reported in CRN, a publication aimed at technology integrators. In response to the story, Lenovo said it was in "preliminary" discussions about a potential acquisition with a third party, which it did not name.

"No material terms concerning the potential acquisition have been agreed and the company has not entered into any definitive agreement," Lenovo said yesterday in the statement.

A Lenovo spokesman said he had no additional comment beyond that statement.

IBM chief financial officer Mark Loughridge said he would not comment on rumours.

Profit at IBM's low-end service business had been "underperforming" compared with other parts of its hardware unit, the company said in a presentation to investors in February. Revenue for the System X business, which sells the servers, declined 9 per cent in the first quarter, IBM said. Even so, the company's total hardware revenue fell more sharply, dropping 17 per cent to US$3.1 billion.

The company said it would take "substantial actions" to improve the business. A combination of divestitures, job cuts and acquisitions would result in charges in the second quarter and gains in the second half, Loughridge said.