Lenovo's IBM server deal faces near-term challenges

After basking in the glow of its US$2.3 billion deal to buy the commodity server business of International Business Machines, it's time for Lenovo to face up to some of the uncertainties the major acquisition brings.

That was also evident from the resumption of trading in the company's shares yesterday after being halted on Thursday, when the IBM deal was announced.

Lenovo's share price climbed early to hit HK$11.28 - its highest mid-day peak since reaching HK$11.45 on April 14, 2000 - before finishing at HK$10.44, up 1.16 per cent.

Its performance showed that investors are not only well aware that Lenovo must bear the rigours of obtaining regulatory approval but also of the fact that the company will encounter inevitable teething problems from integrating IBM's low-end server business into its global operations, according to analysts.

"Historically, hardware mergers and acquisitions have resulted in initial share loss for the combined companies," Toni Sacconaghi, a senior analyst at Bernstein Research in the US, said in a report yesterday.

He cited as examples Hewlett-Packard's US$25 billion merger with Compaq Computer in 2002, as well as Lenovo's US$1.75 billion acquisition of IBM's personal computer business in 2005.

Both HP and Lenovo initially lost market share during their post-merger phases. They eventually regained lost ground to become formidable competitors in the personal computer market.