Lenovo halts trading as speculation on IBM server deal heats up

PUBLISHED : Thursday, 23 January, 2014, 10:22am
UPDATED : Thursday, 23 January, 2014, 10:22am

Trading in the shares of Lenovo, the world’s largest supplier of personal computers, was halted Thursday morning as speculation swirled about the company’s possible acquisition of International Business Machines’ low-end server business.

That notice to the Hong Kong stock exchange was posted less than 15 minutes before the market opened Thursday.

In the company’s regulatory filing, Lenovo chairman and chief executive Yang Yuanqing said trading was halted “pending the release of an announcement in respect of a disclosable transaction”.

Lenovo could end up paying as much US$3 billion to buy IBM’s low-end server business, according to recent estimates. Last year, negotiations between the two companies reached an impasse over price.

If that deal proceeds, it would be Lenovo’s biggest-ever acquisition. In 2005, the Chinese technology giant purchased New York-based 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 on Tuesday.

Moel estimated that transaction could be priced between US$2.5 billion to US$3 billion, which is lower than the US$5 billion valuation that IBM reportedly wanted to seal the deal last year.

Lenovo's Yang said on Tuesday that the company was “in preliminary negotiations with a third party in connection with a potential acquisition”.

That statement was released following reports which said that Lenovo had revived talks to buy IBM’s low-end server business. Neither IBM nor Lenovo had confirmed those 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.

Moel expected Lenovo’s acquisition of IBM’s x86 server division to generate significant revenue. He calculated that business to contribute between US$4 billion and US$5 billion to Lenovo’s annual turnover.

Bernstein data show that Lenovo is forecast to post a record revenue of US$38.66 billion in its fiscal year ending in March, up from US$33.87 billion a year earlier.

In a research note, Moel said: “We expect enterprise products, such as server and storage, to be the next driver [of growth for Lenovo] after smartphones and tablets.” 

Lenovo’s share price was down 1.34 per cent to close at HK$10.32 in trading on Wednesday.