Lenovo to pay US$2.3 billion for IBM's low-end server business

PUBLISHED : Thursday, 23 January, 2014, 5:42pm
UPDATED : Friday, 24 January, 2014, 1:05am

Lenovo, the world's largest supplier of personal computers, has agreed to buy the commodity server business of International Business Machines for US$2.3 billion in cash and shares, marking the biggest-ever acquisition by a Chinese technology company.

The deal, which follows Lenovo's purchase of IBM's personal computer division for US$1.75 billion in 2005, topped online search giant Baidu's US$1.9 billion acquisition of mobile apps store 91 Wireless last year.

In a filing to the Hong Kong stock exchange yesterday, Lenovo said it would pay US$2.07 billion in cash and issue 182 million shares to IBM for its x86 server division.

The IBM unit 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.

A joint statement from Lenovo and IBM yesterday said about 7,500 IBM employees - including workers in Shanghai, Shenzhen, Taipei and Raleigh, North Carolina, in the US - were expected to be offered employment by Lenovo, which has about 48,000 staff worldwide.

Yang Yuanqing, Lenovo's chairman and chief executive, said the acquisition could "help fuel profitable growth and extend our PC Plus strategy", describing the company's expansion beyond its core personal computer business.

It appears to be good timing for Lenovo after talks with IBM last year reached an impasse over price, with the US firm reportedly seeking US$5 billion. Lenovo's filing showed that the IBM unit had an unaudited book value of negative US$644 million and posted a net loss after taxation of US$26.4 million last year.

IBM is sharpening its focus on other businesses, such as a US$1 billion investment in the advanced computing Watson Group. It will continue to make mainframes and other high-performance computers.

Alberto Moel, a senior analyst at Bernstein Research, said Lenovo's acquisition would help it become "China's biggest server provider and a global player by 2016". He estimated the business would add US$4 billion to US$5 billion to Lenovo's revenue.

The transaction is subject to clearance from the Committee on Foreign Investment in the United States, a government panel that reviews foreign acquisitions for national security risks.

"I would assume that Lenovo has done the necessary due diligence and is confident it will pass the [committee's] review," Moel said.

Trading in Lenovo shares was suspended in Hong Kong yesterday. They closed at HK$10.32 on Wednesday.