Lenovo poised to make its biggest acquisition with IBM server deal

PUBLISHED : Tuesday, 21 January, 2014, 11:49am
UPDATED : Wednesday, 22 January, 2014, 3:01pm

Lenovo, the world's largest supplier of personal computers, could end up paying as much as US$3 billion to buy the low-end server business of International Business Machines, months after talks between the two companies reached an impasse over price.

If it proceeds, it would be Lenovo's biggest-ever acquisition. Nine years ago it bought IBM's personal computer business for US$1.75 billion.

"I think the chances of a [server] deal happening this time around are higher, and probably at better pricing for Lenovo," Alberto Moel, a senior analyst at Bernstein Research, said yesterday. "It seems IBM is a more motivated seller."

Moel estimated the transaction could be priced between US$2.5 billion and US$3 billion, less than the US$5 billion IBM reportedly wanted to seal the deal last year.

In a regulatory filing with the Hong Kong stock exchange yesterday, Lenovo chairman and chief executive Yang Yuanqing said: "The company is in preliminary negotiations with a third party in connection with a potential acquisition."

The announcement was made following reports which said that Lenovo had revived discussions to buy IBM's low-end server business.

Neither IBM nor Lenovo has confirmed these reports.

The proposed deal covers 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 large storage systems, as well as in data centres.

Yang announced last year that Lenovo wanted to become a "global player" in servers and storage systems by 2016.

"This is part of our PC-Plus strategy," Yang said, describing the company's expansion beyond its core personal computer business.

Lenovo is already involved in wide-ranging collaboration with America's EMC, the world's top enterprise storage systems maker, which includes building x86 servers for EMC's network-attached storage products.

This co-operation enables EMC to penetrate deeper into the mainland economy, the world's second-biggest, while providing Lenovo with a high-margin business to boost sales in the corporate market.

Moel said he expected a successful acquisition of IBM's x86 server division would generate significant revenue for Lenovo, with server business contributing between US$4 billion and US$5 billion to Lenovo's annual turnover.

Bernstein data shows that Lenovo, which operates in more than 160 countries, is forecast to post record revenue of US$38.66 billion in its fiscal year to March, up from US$33.87 billion a year earlier.