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Lenovo to buy IBM server unit

Publication Date : 24-01-2014

 

Lenovo Group Ltd, the world's biggest personal computer maker, will buy IBM Corp's x86 server unit for US$2.3 billion, Lenovo said on Thursday.

The deal - the largest tech acquisition ever by a Chinese company - will help Lenovo add $5 billion in operating revenue annually and have a bigger say in the global IT hardware space, said Yang Yuanqing, chairman and chief executive officer of the Beijing-based company.

"We're satisfied with the price of the deal, because we believe the company has acquired a very good-quality asset," Yang said.

The Chinese company will take in about 7,500 former IBM employees.

"The acquisition was a huge bargain for Lenovo, which is eyeing a bigger presence in the information and communication technology market," said Antonio Wang, associate director and project leader for IDC China's client system research department.

According to estimates by industry insiders, IBM's server unit was thought to be worth as much as $5 billion.

Lenovo will become the third-largest x86 server maker globally and the biggest in China after the deal is closed, IDC said. The company was the seventh largest as of the third quarter of 2013, with 2.6 per cent of the global market share.

Texas-based manufacturer Dell Inc was the top server provider in China as of the third quarter of 2013. Dell held more than 20 per cent of the nation's x86 server market at that point, data from IDC showed.

"Lenovo will recover its investment in about five years as the unit is able to generate $300 million to $500 million in annual profit," Wang added.

Yang was more conservative about the unit's profitability, saying the business barely earned profits for IBM over the past quarters, but he added the company is confident about the unit's long-term earning potential.

"We'll enjoy a sharper growth curve in the server sector than in the PC market, because Lenovo has become a global company and is more experienced now," Yang added.

Lenovo took about five years to bring its PC sector back on track after it acquired IBM's PC unit in 2005 for $1.25 billion.

Gene Cao, senior analyst at Forrester Research Inc, warned that Lenovo should learn some lessons from the previous buyout of IBM's PC business.

"The company should find ways to keep the R&D team at the unit and better integrate sales channels," said Cao.

Yang said that integrating new units of this size will not be a problem for Lenovo, because the company is strong and flexible enough to quickly merge new units into its global structure.

The deal is expected to be completed in the next few months after passing a regulatory review process in the United States.

"This new IBM-Lenovo deal may potentially receive more attention from US authorities than the PC business acquisition years ago," said Cao.

Many x86 servers are used in key areas in the US, including government, telecommunications and financial system offices.

The US government is known to be sensitive when it comes to Chinese M&A deals in the IT sector.

In 2011, Chinese company Huawei Technologies Co Ltd's attempt to acquire US-based 3Leaf Systems Inc was blocked by the US government, which cited security concerns.

Lenovo will fully cooperate with the US government's review process, Yang said.

Lenovo is vigorously exploring both the consumer electronics and enterprise equipment markets amid the slump in the global PC market.

 

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