* Companies abandoned talks last year over pricing
* Dell Inc also likely to be interested - media reports
* IBM server unit value likely $2.5-$3 bln - analysts
NEW YORK/HONG KONG, Jan 21 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 remould itself as a
growing force in mobile devices and data storage servers. It
also helps IBM's shift away from hardware towards software and
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
Baidu 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
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
"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
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.