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PUBLISHED : Monday, 03 June, 2013, 10:57am
UPDATED : Monday, 03 June, 2013, 10:57am

Lenovo raises funds, IBM servers in sight?

Lenovo's upcoming debt offer is likely to raise US$1 to $2 billion, and will be used to help finance its desired purchase of IBM's low-end server business

BIO

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young’s China Business Blog (www.youngchinabiz.com), commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, “The Party Line: How the Media Dictates Public Opinion in Modern China.”
 

PC giant Lenovo (0992.HK) has announced plans for a major new bond issue, in the latest signal that it still hopes to revive stalled talks to buy IBM's (NYSE: IBM) low-end server business. More broadly speaking, this announcement also marks a new chapter in Lenovo's development as it adds bonds to its arsenal of to tools for financing global M&A. In the past, Lenovo typically gave stock to finance a big part of its global M&A, which was the case with its landmark purchase of IBM's PC business in 2005 and its more recent formation of a joint venture with Japan's NEC (Tokyo: 6701).

According to its latest announcement, Lenovo will issue an unspecified amount of bonds denominated in US dollars. Lenovo says the debt will be sold to institutional and professional investors, and that nine top- and mid-tier investment banks will handle the offering, led by Credit Suisse and Goldman Sachs (NYSE: GS).

Interestingly, the list of investment banks includes two from Japan, indicating the company will aggressively look for buyers in that market. Lenovo says the debt will be used partly to finance its aggressive global M&A campaign of the past two years, which has included purchases in Japan, Germany and Brazil. While no amount is given, the number of banks participating indicates the figure could be quite large, most likely over US$1 billion and perhaps even larger than US$2 billion.

All of this points back to Lenovo's strong desire to purchase the IBM's low-end server business, as the Chinese tech giant looks to diversify beyond its core PC business. Lenovo chief Yang Yuanqing has made it clear numerous times this year that traditional PCs are no longer his company's main focus, as he repeatedly stresses that his biggest rivals are smartphone and tablet PC leaders Apple (Nasdaq: AAPL) and Samsung (Seoul: 005930). Servers could be another important growth area, as such computers are one of the main components for web hosting and cloud computing.

Let's take a quick look back at the IBM talks, which emerged in April media first reported that the two companies were negotiating a deal that would easily be the largest purchase by Lenovo in the company's history. The talks later broke down over price, with IBM reportedly seeking up to US$6 billion for its x86 server business.

Despite the breakdown, I predicted that talks would quickly resume after each company had time to re-think its position, as both really want this deal to happen. This announcement of this major new debt offering seems to be Lenovo's latest signal to indicate it hasn't given up its aim of reviving the deal, and that talks have already either restarted or that it intends to make a new offer in the near future.

I've been a critic of many of Lenovo's global acquisitions in the past, many of which are struggling companies in unfamiliar markets, making its chances of success difficult. But in this case, I really do think the IBM deal looks like a good fit for a number of reasons. Lenovo is already quite familiar with the US from its previous IBM purchase, and its US headquarters are in the same geographic area as the IBM server unit. The low-end server business would also complement Lenovo's existing product lines and offer better growth prospects than its fading core PC business.

At the end of the day, I would expect to see these two companies return to the bargaining table and strike an initial deal perhaps by the end of this month, settling on a price in the US$4 to $6 billion range. When they agree on a price, this upcoming debt offering will become, a key part of the financing plan, as Lenovo makes its biggest-ever acquisition as part of its ongoing transformation.

Bottom line: Lenovo's upcoming debt offer is likely to raise $1-$2 billion, and will be used to help finance its desired purchase of IBM's low-end server business.

To read more commentaries from Doug Young, visit youngchinabiz.com

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