The long-expected acquisition comes nearly a decade after Lenovo
bought IBM's money-losing ThinkPad business for $1.75 billion,
eventually becoming the world leader in personal computers in 2012.
The sale of the low-end server operation — which still needs U.S.
government approval — would allow IBM to focus on its decade-long
shift to more profitable software and services.
The deal would increase Lenovo's share in the server market to 14
percent from 2 percent, said Peter Hortensius, a senior
vice-president at Lenovo.
The deal needs clearance from the Committee on Foreign Investment in
the United States (CFIUS), which protects U.S. national security.
Chinese companies faced the most scrutiny over their U.S.
acquisitions in 2012, according to a CFIUS report issued in
Lenovo's purchase of IBM's notebook division faced scrutiny before
approval, and this time will be easier, analysts said.
"It's fair to say that this deal is more likely to get through CFIUS
without major problems than the 2005 transaction," said John
Reynolds, a partner at law firm Davis Polk & Wardwell in Washington,
D.C. who has handled CFIUS issues for 20 years.
Reynolds saw relatively little national security risk in the deal,
noting that Lenovo was well-known in the United States.
Maybank Kim Eng analyst Warren Lau noted that the System X server,
among the systems to be bought by Lenovo, is based on commoditized
technology and components from the United States.
This deal is likely also to win U.S. antitrust approval, perhaps
within weeks, said Jonathan Lewis, an antitrust partner with Baker &
Hostetler LLP. "Given that Lenovo is likely to take advantage of its
lower-cost manufacturing base in China, this deal is likely to be
viewed as pro-competitive."
IBM shares edged 0.2 percent lower to $182.27 at mid-afternoon
Thursday. Trading in Lenovo shares was halted before the close in
Hong Kong ahead of the announcement.
SEVEN QUARTERS OF LOSSES
The deal with Lenovo marks another step in IBM's switch away from
hardware to software and services. IBM said this month it would
spend more than $1.2 billion to build up to 15 data centers on five
continents to expand its cloud services and reach new clients and
The company also said it would invest more than $1 billion to
establish a new business unit for Watson — the supercomputer system
that beat humans on the TV quiz show "Jeopardy" — to offer cloud
services to businesses and consumers.
With Lenovo's PC business under siege from powerful smartphones and
super-fast tablets, the company is remodeling itself as a force in
mobile devices and data storage servers.
It would not be easy for Lenovo turn around the server unit,
however. IBM's low-margin server business has posted seven quarters
of losses as clients move to the cloud.
"To generate costs synergy, Lenovo will need to move most of the
manufacturing from IBM's existing facility in Virginia to Asia while
keeping some R&D in the U.S.," Lau said.
The server business being sold by IBM, which produced low-cost x86
servers, competes with Hewlett-Packard Co and Dell but lags both in
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IBM dominates the higher-end server market with a 57 percent share,
according to research firm Canalys. IBM will retain its
higher-margin server systems and continue to develop software and
applications for the x86 platform.
Following closure of the deal, Lenovo will offer jobs to 7,500 IBM
employees and assume customer service and maintenance operations.
"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," said Lenovo's Hortensius.
Analysts said Lenovo would 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 widespread U.S.
BIGGEST TECH DEAL
Lenovo said it expected demand for computing power and recovery of
global enterprise spending to further drive growth in the x86 server
Lenovo has agreed to pay $2.07 billion in cash and the rest with
stock of the Hong Kong-listed PC maker.
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 clout of China's technology firms
as they expand overseas.
The unit posted a loss of $26.4 million after tax for the 12 months
ended December 31, compared with a profit of $187 million in the 12
months ended March 2013. The x86 unit has annual revenue of $4.6
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 problems
in China following revelations of U.S. electronic spying and ongoing
weakness in hardware sales.
The world's biggest technology services company posted a 23 percent
drop in fourth-quarter revenue from China.
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 percent rise
in its shares this year. The Hang Seng stock index is down 2.5
percent in the same period.
IBM's server business is the world's second-largest, with a 22.9
percent share of the $12.3 billion market in the third quarter of
2013, according to technology research firm Gartner.
Hewlett-Packard is the biggest player, while Lenovo does not appear
in the top five.
Lenovo said it was advised by Credit Suisse and Goldman Sachs Group.
(Additional reporting by Diane Bartz in
Washington; editing by Denny Thomas, Stephen Coates, Ryan Woo, Ted
Kerr and Richard Chang)
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