Lenovo to buy IBM’s server business in China’s biggest tech M&A

Lenovo Group Ltd has agreed to buy IBM Corp's server business for $2.3 billion as the Chinese PC giant grabs another piece of the computing world in a long-awaited deal.

The acquisition comes nearly a decade after Beijing-based Lenovo bought International Business Machines's (IBM) loss-making ThinkPad business for $1.75 billion, eventually becoming the world leader in personal computers in 2012.

But with the PC business now under siege in the face of powerful smartphones and super-fast tablets, Lenovo is diversifying its revenue and remodeling itself as a force in mobile devices and data storage servers.

The acquisition of the IBM unit, still subject to approval from the Committee on Foreign Investment in the United States (CFIUS), would lift Lenovo's market share in the server market to 14 per cent from 2 per cent currently, said Peter Hortensius, senior vice-president at Lenovo and president of its Think Business Group.

Before that happens, Lenovo has to turn the server unit around. The low-margin business - which sells less powerful and slower x86 servers than IBM's other higher-margin offerings - has posted seven quarters of losses as more clients switch to cloud storage from traditional infrastructure.

"We will do a variety of things, improve products, drive improved costs, and couple it with the scale we have and our PC business to improve go-to-market," Hortensius told Reuters on Thursday after the deal was announced.

Analysts say Lenovo will likely find it easier than IBM to sell the x86 servers to Chinese companies as Beijing tries to localize its IT purchases in the wake of revelations about U.S. surveillance.

Lenovo said it expects demand for computing power and recovery of global enterprise spending to further drive growth in the x86 server market.

Lenovo has agreed to pay $2.07 billion in cash and the rest with stock of the Hong Kong-listed PC maker, in a deal set to be China's biggest-ever technology M&A.

The deal surpasses Baidu Inc's $1.85 billion acquisition of 91 Wireless from NetDragon Websoft Inc last year, according to Thomson Reuters data, and underscores the growing clout of the country's technology firms as they look to expand overseas.

For IBM, the sale allows the company to focus on its decade-long shift to more profitable software and services.

"What the business is worth to IBM is no longer relevant. The only thing that matters is what it's worth to Lenovo," said Alberto Moel, a Hong Kong-based analyst at Sanford C. Bernstein. "If Lenovo can improve the margins... that could offset any continued revenue shrinkage."

The unit posted a $26.4 million loss after tax for the 12 months ended December 31, compared with a $187 million profit in the 12 months ended March 2013.

The x86 unit has annual revenues of $4.6 billion, Lenovo told Reuters.

Higher Valuations

Talks between IBM and Lenovo fell apart last year due to differences over pricing, with media reports at the time suggesting IBM wanted as much as $6 billion for the unit.

Analysts said the sale may have been accelerated by IBM's China woes and ongoing weakness in hardware sales, after the world's biggest technology services company reported a 23 per cent drop in fourth-quarter revenue from China on Tuesday.

Lenovo's purchase of IBM's PC business in 2005 became the springboard for its leap to the top of global PC maker rankings, and the market is betting Lenovo will enjoy similar success with its latest acquisition, which is partly reflected in a 9.44 per cent rise in its shares this year. The broader Hang Seng index is down 2.5 per cent in the same period.

IBM's server business was the world's second-largest, with a 22.9 per cent share of the $12.3 billion market in the third quarter of 2013, according to technology research firm Gartner.

Hewlett-Packard Co is the biggest player, while Lenovo does not appear in the top five.

"The acquisition presents a unique opportunity for the company to gain immediate scale and credibility in this market," Lenovo said in a statement on Thursday.

Credit Suisse and Goldman Sachs Group advised Lenovo, the PC maker said.

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