Len­ovo to buy IBM server unit

China Daily (Canada) - - FRONT PAGE - By GAO YUAN in Bei­jing and JACK FREIFELDER in New York

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 vi­cepres­i­dent with the en­ter­prise servers re­search team at In­ter­na­tional Data Corp, a New York­based 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 third­largest 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 IBMLen­ovo deal may po­ten­tially re­ceive more at­ten­tion from US au­thor­i­ties than the PC busi­ness ac­qui­si­tion years ago,” Cao said. Con­tact the writ­ers at gaoyuan@ chi­nadaily.com.cn and jack­freifelder@chi­nadai­lyusa.com

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