Lenovo, the world's second-largest personal computer supplier, is holding firm on getting "a reasonable price" after reaching an impasse in negotiations to buy part of the server business of International Business Machines, sources say.
"The talks haven't broken down, but there is a gap in the valuation [of the target business] between the buyer and the seller," a person familiar with the discussions said.
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 data centres.
News of the potential acquisition emerged last month, with some reports speculating that the transaction could be worth around US$5 billion.
But Lenovo aims to secure "a reasonable price", which would be about a third of what IBM had asked for during the negotiations, another source said.
Alberto Moel, a senior analyst at Bernstein Research, said if the two parties broke their deadlock over price, the deal would be Lenovo's biggest acquisition since it bought IBM's personal computer division for US$1.75 billion in 2005.
"A quick valuation of [IBM x86 server business] sales would put the deal in the US$1.5 billion to US$2.5 billion range," Moel said.
"Lenovo should end up with US$4 billion in cash for its current fiscal year, so it can certainly raise necessary debt given its balance sheet. It also has a history of using equity to finance deals."
Neither IBM nor Lenovo has confirmed the talks. In a Hong Kong stock exchange filing last month, Lenovo chief executive Yang Yuanqing simply acknowledged that the company was negotiating with "a third party in connection with a potential acquisition".
Research firm IDC said IBM ranked third behind Hewlett-Packard and Dell in the global x86 server market. Moel said: "That IBM business is about US$4.7 billion in [annual] revenue, which would be a major addition to Lenovo."
He described Lenovo's existing x86 server operation as "tiny, about 2 to 3 per cent" of its annual turnover.
In 2008, Lenovo licensed IBM's x86 server technology to produce low-cost "ThinkServer"-brand machines designed for small companies.