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Lenovo buys IBM server division in China's biggest tech purchase

January 24, 2014



Lenovo has agreed to buy part of IBM's server business for $2.3 billion (R25bn) as the Chinese personal computer (PC) giant grabs another piece of the computing world in a long-awaited deal.

The acquisition comes almost a decade after Beijing-based Lenovo bought IBM's loss-making ThinkPad business for $1.75bn, eventually becoming the world leader in PCs in 2012.

But with the PC business under siege in the face of smartphones and super-fast tablets, Lenovo is diversifying its revenue and remodelling 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 US, would lift Lenovo's market share in the server market to 14 percent from 2 percent currently, Peter Hortensius, a senior vice-president at Lenovo and president of its Think Business Group, said yesterday.

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 said after the deal was announced.

Analysts say Lenovo may find it easier than IBM to sell the x86 servers to Chinese companies as Beijing tries to localise its information technology purchases in the wake of revelations about US surveillance.

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

Lenovo has agreed to pay $2.07bn 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 acquisition.

The deal surpasses Baidu's$1.85bn acquisition of 91 Wireless from NetDragon Websoft 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," Alberto Moel, an analyst at Sanford C Bernstein, said.

"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 calendar year last year, compared with a $187m profit in the 12 months to March last year.

The x86 unit had annual revenues of $4.6bn, Lenovo said.

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 $6bn for the unit.

Analysts said the sale might have been accelerated by IBM'sChina woes and ongoing weakness in hardware sales, after the biggest technology services company reported a 23 percent 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 percent rise in its shares this year. Hong Kong'sHang Seng index is down 2.5 percent in the same period.

IBM's server business was the second-largest, with a 22.9 percent share of the $12.3bn market in the third quarter of last year, according to research firm Gartner.

The Star


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Source: Star, The (South Africa)


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