IBM Restarts Lenovo Talks On Sale Of Server Business

IBM has restarted talks with Lenovo over selling its x86 server business to the Chinese PC giant, and a deal may be imminent, according to reports.

IBM sold its desktop and laptop PC business to Lenovo in 2005 in a $4.9bn (£3bn) deal that marked the beginning of Lenovo’s rise to prominence in the PC market. Last year Lenovo surpassed HP to become the world’s biggest PC maker.

Server deal

Lenovo and IBM were reportedly in talks last spring over a sale of IBM’s low-end server business, but the deal stalled over the unit’s valuation – IBM was looking for between $4bn and $6bn, while Lenovo reportedly offered less than $2.5bn.
Since then, however, IBM’s hardware revenues have worsened – the company’s hardware business lost $713m in the first nine months of 2013, compared to $253m in profits for the same period the previous year – and its server sales were weak for the most recent quarter, according to financial analysts. IBM, which has a market value of more than $200bn, is to report financial figures later on Tuesday.

A deal with Lenovo could be signed “within a week”, according to a Bloomberg report citing a person with “direct knowledge” of the matter.

IBM has been looking to shed its hardware operations and focus on software and services, announcing it would this year invest $1.2bn in data centres for cloud services.

Diversification

Lenovo, on the other hand, could potentially gain from the acquisition by reducing operating costs and widening profit margins, amalgamating its existing server business with IBM’s, while server sales could also help boost other areas such as support services, according to industry observers.

The shift toward servers is part of Lenovo’s broader strategy of diversifying away from its reliance on a shrinking PC market. Lenovo’s chief executive, Yang Yuanqing, has said he is looking to double Lenovo’s share of the worldwide server market within three years, alongside an aggressive drive into the smartphone market. Last year Yang told China Daily that in smartphones Lenovo is aiming to “outperform Samsung and Apple, at least in the Chinese market”.

Lenovo was last year reported to be negotiating to buy NEC’s mobile unit.

Lenovo confirmed to Reuters on Tuesday that it is in preliminary talks on an acquisition related to a server business, but declined to give further details. An IBM spokesman said the company would not comment on the matter.

Dell, which last year went private in a $25bn transaction, was also reported over the weekend to be interested in IBM’s low-end server business. However, Dell, like IBM is putting less emphasis on hardware sales and increasing services – which was a large part of the reason for its move off the stock market to become a private company last year.. Dell did not immediately respond to a request for comment.

Any sale of such a major server business to a Chinese company would be likely to face close scrutiny by US regulators, as did the 2005 PC transaction, which was reviewed by the US Congress and the US Committee on Foreign Investment before finally being approved.

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