NEW YORK/HONG KONG China's Lenovo Group Ltd has resumed talks to buy International Business Machines Corp's (IBM) low-end server unit, a source familiar with the matter said, a purchase that would bolster its efforts to diversify beyond a shrinking PC market.
A deal for IBM's x86 servers, which power corporate data centers, fits in with Lenovo's attempts to remold itself as a growing force in mobile devices and data storage servers. It also helps IBM's shift away from hardware towards software and services.
The two companies failed to reach an agreement last year after differing on pricing. Media reports then put IBM's hopes at between $4 billion to $6 billion for the unit, while Lenovo was said to be only willing to offer $2.5 billion.
Analysts now estimate the sale of the IBM unit to Lenovo could be worth between $2.5 billion and $3 billion. That would make it the biggest ever deal in China's IT sector, outpacing Badu Inc's acquisition of 91 Wireless from NetDragon Websoft Inc for $1.85 billion last year.
"Everybody wins because even if IBM could double the profitability it's still not good enough for IBM. On the other hand, Lenovo doubling the server business margins is a good deal for Lenovo," said Alberto Moel, a Hong Kong-based analyst at Sanford C. Bernstein.
Lenovo, the world's biggest PC maker, said on Tuesday it was in preliminary talks about an acquisition. It declined to name the seller but said it was making the statement in response to reports about its potential acquisition of a server business.
It added that it had not entered into any definitive agreement and that no material terms had been agreed to.
An IBM spokesman said on Monday the company wouldn't comment on the matter.
Dell Inc, which went private in a $25 billion deal last year, has also been cited in media reports as a potential suitor for the business. A Beijing-based spokesman for Dell declined to comment.
EAGER SELLER, FLUSH BUYER
Lenovo's purchase of IBM's Thinkpad PC business in 2005 for $1.75 billion became the springboard for its leap to the top of global PC maker rankings.
Moel, who estimates IBM's low-end server business could be worth between $2.5 billion to $2.9 billion, said IBM was likely more eager now to do a deal than last year after several quarters of weak earnings.
But any deal would also likely invite scrutiny from the Committee on Foreign Investment in the United States (CFIUS) as servers were more directly related to data security than PCs and phones, he added.
Lenovo could finance the deal through a combination of cash, debt and converts, said Nicolas Baratte, a Hong Kong-based analyst with brokerage CLSA. The company has $3 billion in cash, and very little debt, and IBM is a very willing seller, he added.
"If IBM sells all its server business, except the top-end servers, the deal is worth $2.5 to $3 billion," Baratte said.
"There is no financing problem for $3 billion, but I don't think it will be one hundred percent cash."
Shares in Lenovo, which has a market value of $13.7 billion, closed up 2.75 percent at HK$10.46 on Tuesday, while the benchmark Hong Kong share index was up 0.5 percent.
Its shares have surged 12 percent this year, and earlier this month marked their highest level in more than 13 years after an IDC report showed it managed to boost PC shipments 9 percent in the fourth quarter while industry shipments slid 5.6 percent.
IBM is due to report fourth-quarter earnings later on Tuesday. In the previous quarter, revenue missed expectations, hit by a 40 percent drop in China hardware sales.