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Lenovo Restarts Talks To Buy IBM Server Unit: Source

China’s Lenovo Group Ltd has resumed talks to buy International Business Machines Corp’s (IBM) low-end server unit, a source familiar with the matter said – a purchase that would bolster its efforts to diversify beyond a shrinking PC market.Lenovo tablets and mobile phones

The two companies failed to reach a deal last year after differing on pricing, with media reports then putting IBM’s hopes at between $4 billion to $6 billion for the unit, while Lenovo was said to be only willing to offer $2.5 billion.

Lenovo, the world’s biggest PC maker, said on Tuesday it was in preliminary talks about an acquisition. It declined to name the seller but said it was making the statement in response to reports about its potential acquisition of a server business.

It added that it had not entered into any definitive agreement and that no material terms had been agreed to.

An IBM spokesman said on Monday the company wouldn’t comment on the matter.

Dell Inc, which went private in a $25 billion deal last year, has also been cited in media reports as a potential suitor for the business. A Beijing-based spokesman for Dell declined to comment.

A deal for IBM’s x86 servers which power corporate data centers would fit in with Lenovo’s attempts to remold itself as a growing force in mobile devices and data storage servers, and with IBM’s shift away from hardware towards software and services.

“Everybody wins because even if IBM could double the profitability it’s still not good enough for IBM. On the other hand, Lenovo doubling the server business margins is a good deal for Lenovo,” said Alberto Moel, a Hong Kong-based analyst at Sanford C. Bernstein.

Lenovo’s purchase of IBM’s Thinkpad PC business in 2005 for $1.75 billion became the springboard for its leap to the top of global PC maker rankings.

Moel, who estimates that IBM’s low-end server business could be worth between $2.5 billion to $2.9 billion, said that with IBM having had several weak earnings quarters, it was likely more eager to do a deal than last year.

But any deal would also likely invite scrutiny from the Committee on Foreign Investment in the United States (CFIUS) as servers were more of a “hot button” issue than PCs and phones, he said. He added that he expected a deal could still be done.

Shares in Lenovo, which has a market value of $13.7 billion, were up 3.7 percent at HK$10.57 in morning trade, while the benchmark Hong Kong share index was up 0.5 percent.

Its shares have surged 12 percent this year, and earlier this month marked their highest levels in more than 13 years after an IDC report showed it managed to boost PC shipments 9 percent in the fourth quarter while industry shipments slid 5.6 percent.

IBM is due to report fourth-quarter earnings later on Tuesday. In the previous quarter, revenue missed expectations, hit by a 40 percent drop in China hardware sales.

(Reporting by Ryan Vlastelica, Devika Krishna Kumar, Paul Carsten, Donny Kwok and Denny Thomas; Editing by Edwina Gibbs)

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