Potential IBM deal to lift Lenovo into x86 server top ranks

Purchase of server business by second-largest supplier of personal computers would propel Chinese firm into top ranks of that industry

PUBLISHED : Saturday, 08 June, 2013, 12:00am
UPDATED : Saturday, 08 June, 2013, 4:07am

A potential deal by Lenovo to buy part of International Business Machines' server business could propel the Chinese technology giant into a global player in that segment of the computer industry, analysts say.

That acquisition is also forecast to trigger a lengthy investigation by the United States government.

There has been speculation since April that the firm, the world's second-largest supplier of personal computers, is in talks to purchase the IBM division that makes and sells commodity x86-standard servers, which are the low-cost, general-purpose corporate computers used to run business applications and which serve as the basic hardware inside data centres.

Alberto Moel, a senior analyst at Bernstein Research, said in a report published yesterday that purchasing the IBM x86 server business "would be transformational for Lenovo", putting it on the fast track to be the mainland's biggest server supplier and a major international player by 2016.

In contrast, Lenovo's bid to establish a smartphone joint venture - with Japanese firm NEC, according to the rumour - is not expected to lift the computer maker into the top-tier of handset brands in a way that will challenge Samsung Electronics and Apple.

Lenovo chairman and chief executive Yang Yuanqing announced last month that the company wanted to become a "global player" in servers and storage systems over the next three years.

Neither IBM nor Lenovo has confirmed the reports that said the two were in negotiations. Reports last month said the talks reached an impasse over the valuation of the business.

Bernstein estimated the deal's value would range from US$1.5 billion to US$2.5 billion. Moel said Lenovo could use US$1 billion of the US$3.5 billion cash war chest it had at the end of March for the purchase, in addition to either debt or equity. The size and scale of IBM's x86 server business would mean that its acquisition would be subject to review by the Committee on Foreign Investments in the United States, a government panel that reviews foreign acquisitions for national security risks.

Tony Sacconaghi, a senior analyst at Bernstein, noted in a separate report that Lenovo's US$1.25 billion purchase of IBM's personal computer business in 2005 took the committee 60 months to review.

"We suspect that a sale of the x86 server business to Lenovo could take a similar time frame or longer," Sacconaghi said.

The reason is that "servers play a more critical role" in corporate and government infrastructure, he added.

Technology research firm IDC said IBM was the world's third-biggest supplier of x86 servers in the first quarter, behind Hewlett-Packard and Dell.