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Lenovo to buy IBM server unit

By Gao Yuan in Beijing and Jack Freifelder in New York | China Daily USA | Updated: 2014-01-24 12:59

Lenovo Group Ltd, the world's largest personal computer maker, said it agreed to buy IBM Corp's low-end server unit for $2.3 billion in what would be the largest technology acquisition by a Chinese company.

The deal would surpass Baidu Inc's $1.85 billion acquisition of 91 Wireless from NetDragon Websoft Inc last year. It would add $5 billion to Lenovo's annual operating revenue and give the Beijing-based company a bigger say in the global IT hardware space, Chairman and Chief Executive Yang Yuanqing said.

The acquisition, announced Thursday, is expected to be completed in the next few months, after passing a US regulatory review.

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

Although the x86 server business barely turned a profit for IBM in past quarters, Yang said Lenovo is confident about the unit's long-term earning potential. Many x86 servers are used in key areas in the US, including government, telecommunications and financial system offices.

"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 said.

Lenovo's decision to purchase IBM's ThinkPad PC unit in 2005 for $1.75 billion helped the Chinese company become a PC industry standard-bearer.

Vernon Turner, a senior vice-president with the enterprise servers research team at International Data Corp, a New York-based market research, analysis and advisory firm, said IBM's most recent earnings report could have spurred the deal.

The report, which beat analysts' per-share estimates, "probably accelerated the mutual interest", Turner told China Daily. "First of all, this deal has been in the works for some time so it was just a matter of getting to the bottom line. IBM is not selling any of its proprietary technology and it's just offloading a technology that is common across the server landscape. I think IBM is doing the right thing."

Lenovo will become the third-largest x86 server maker globally and the biggest in China when the deal closes, IDC said. It was the world's seventh largest x86 server maker as of third-quarter 2013, with 2.6 percent of the global market.

Texas-based Dell Inc was the top server provider in China as of the third quarter, with more than 20 percent of the x86 server market in the country, according to IDC data.

Turner said he sees the deal as an opportunity for Lenovo to shake up the balance of power in the server market.

"There will be some shifts in the absolute market in terms of volumes and Lenovo could move into a top-five player," Turner said. "The landscape will change and Lenovo is picking up the slack because it's really good at distribution and price points, not to mention it's within a different profit margin than IBM."

Once the deal wins approval, Lenovo will take on 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. "Lenovo will recover its investment in about five years as the unit is able to generate $300 million to $500 million in annual profit."

Yang said that integrating 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.

Gene Cao, senior analyst at Forrester Research Inc, said Lenovo needs to find ways to keep its R & D team from leaving and to better integrate its sales channels. "This new IBM-Lenovo deal may potentially receive more attention from US authorities than the PC business acquisition years ago," Cao said.

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