Lenovo's IBM ties may pave way for enterprise storage acquisition

PUBLISHED : Thursday, 06 February, 2014, 1:50pm
UPDATED : Friday, 07 February, 2014, 4:47am

Lenovo could be looking at another big deal with International Business Machines, following its acquisition of IBM's low-end server division, analysts said.

Under a US$2.3 billion agreement to buy IBM's x86 server business, Lenovo appears to be paving the way for a future acquisition involving enterprise storage systems. As part of the x86 server deal, Lenovo will manufacture and resell IBM's entry-level and midrange enterprise storage products.

Christian Perry, a senior analyst at Technology Business Research, said the agreement bears watching, "because we believe that the storage business is also a potential target for divestiture by IBM".

"If Lenovo experiences success in reselling pieces of that portfolio, it could consider acquiring that business from IBM in the future," Perry said.

Lenovo will be manufacturing and reselling disk and tape storage systems, as well as several system software products offered by IBM.

The products are part of IBM's systems and technology business segment, which contributed US$14.4 billion to the Armonk, New York-based company's overall revenue of US$99.8 billion last year.

The systems and technology segment makes up the remaining hardware business of IBM, which has been focusing more on high-margin professional services and software. Lenovo purchased IBM's personal computer division for US$1.75 billion in 2005.

In last year's fourth quarter, storage accounted for 22 per cent of total revenue for IBM's systems and technology business segment. The share of servers was 69 per cent, while that of microelectronics manufacturing was 9 per cent.

In IBM's earnings call with analysts on January 21, chief financial officer Martin Schroeter said profit in the company's systems and technology business segment fell by about US$1.7 billion last year.

Yang Yuanqing, Lenovo's chairman and chief executive, announced last year that the company wanted to become "a global player" in servers and storage systems by 2016.

Lenovo has been involved in a wide-ranging collaboration with US-based EMC - the world's top supplier of enterprise storage systems - which includes building x86 servers for EMC's network-attached storage products.

Perry said: "Lenovo is making progress with its EMC joint venture, and it has plenty of work ahead to integrate IBM's x86 server business.

"I expect Lenovo to expand its storage capabilities over time, either by extending the EMC joint venture or through acquisitions."

Last month, Lenovo also agreed to buy smartphone maker Motorola Mobility from Google for US$2.91 billion.

Lenovo has ample financial wherewithal to pursue another major corporate takeover, with its total available credit facilities amounting to US$8.1 billion.