Lenovo buys IBM's server business in China's biggest IT acquisition

BEIJING Thu Jan 23, 2014 4:18am EST

BEIJING Jan 23 (Reuters) - Lenovo Group Ltd, the world's largest PC maker, agreed to buy IBM Corp's low-end server business in a long-awaited deal valued at about $2.3 billion, the biggest-ever tech acquisition by a Chinese company.

Lenovo will pay $2.07 billion in cash and the rest with stock of the Beijing-based PC maker, the company said in a statement to the Hong Kong exchange on Thursday.

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

The acquisition will allow Lenovo to diversify revenue away from the shrinking PC business and remodel itself as a growing force in mobile devices and data storage servers. Analysts said Lenovo will likely find it easier than International Business Machines (IBM) to sell the x86 servers to Chinese companies as Beijing tries to localise its IT purchases in the wake of revelations about U.S. surveillance.

The sale allows IBM to dump its low-margin x86 business - which sells less powerful and slower servers than the company's higher-margin offerings - and focus on the firm's decade-long shift to more profitable software and services. The unit had reported seven straight quarters of declining revenue.

"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."

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. 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.

Credit Suisse and Goldman Sachs advised Lenovo, PC maker said in its statement.

HIGHER VALUATIONS

Talks between IBM and Lenovo fell apart last year due to differences on 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 percent drop in fourth-quarter revenue from China on Tuesday.

Revenue from its hardware business, including servers, fell for the ninth consecutive quarter as more companies switched to the cloud from traditional infrastructure.

IBM's server business was 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 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 on Thursday.

The x86 unit has annual revenues of roughly $4 billion, analysts estimate.