Lenovo Buys IBM Server Unit For $2.3bn Amid PC Downturn

Lenovo Group, the world's largest maker of personal computers, will buy US technology giant IBM's low-end server business for $2.3bn (£1.4bn, €1.7bn), amid a slump in global PC shipments.

Lenovo will pay $2.07bn in cash and the rest with equity of the Beijing-based PC maker, the company said in a statement to the Hong Kong Stock Exchange on 23 January. Credit Suisse and Goldman Sachs advised Lenovo.

The deal, to acquire the IBM division that makes the x86 servers, is the biggest-ever tech acquisition by a Chinese firm.

The deal eclipses China's biggest search engine Baidu's 2013 acquisition of 91 Wireless from NetDragon Websoft for $1.85bn, according to Thomson Reuters data.

The purchase will add an additional revenue stream to Lenovo's shrinking PC business and help the firm transform itself as a growing force in mobile devices and data storage servers.

Analysts said Lenovo will probably find it easier than IBM to sell the x86 servers to Chinese firms as Beijing attempts to localise its IT purchases following revelations about US global surveillance practices.

The sale allows IBM to exit its low-margin x86 business and concentrate on its decade-long transition to more profitable software and services.

The x86 unit has annual revenues of about $4bn. The unit has reported seven consecutive quarters of declining revenue.

Analysts also said IBM's China woes and the ongoing slowdown in hardware sales could have compelled the firm to hasten the deal. The world's largest technology services provider on 21 January reported a 23% drop in fourth-quarter revenue from China.

Regulatory Hurdles

The deal will need US regulatory approval. The Committee on Foreign Investment in the US reviews transactions for national-security issues and is headed by Treasury Secretary Jacob J Lew.

The panel comprises of the heads of several federal agencies including the departments of commerce, defence, homeland security, justice, state and the Office of the US Trade Representative.

Lenovo could lose some of IBM's traditional customers in the US, but any loss could be compensated by gains in its home market, Stephen Yang, a Hong Kong-based analyst at Sun Hung Kai Financial told Bloomberg.

"The acquisition presents a unique opportunity for the company to gain immediate scale and credibility in this market," Lenovo said on Thursday.

"What the business is worth to IBM is no longer relevant. The only thing that matters is what it's worth to Lenovo," said Alberto Moel, a Hong Kong-based analyst at Sanford C Bernstein.

"If Lenovo can improve the margins... that could offset any continued revenue shrinkage," Moel told Reuters.

IBM Revenues Hit

IBM on 21 January reported a decline in full year revenues as its sales in emerging markets, including China, suffered due to the Edward Snowden National Security Agency (NSA) scandal.

For 2013, the firm's revenues declined 5% to $99.8bn from $104.5bn in 2012.

PC Shipments Bottom-Out

Worldwide PC shipments fell by 10% during 2013, marking the worst yearly decline in the market's history - but there could be a light at the end of the tunnel, as analysts claimed the drop had "bottomed out," and that the market was expected to stablise.

Shipments fell by 6.9% to 82.6 million units in the fourth quarter of 2013, but analyst firm Gartner, which has been tracking the industry since the 1980s, said the worst could well be behind it.