China’s Lenovo agrees deal to buy IBM’s server unit

Lenovo Group, the world's largest PC maker, agreed to buy IBM Corp's low-end server business in a long-awaited deal valued at about $2.3 billion, the biggest-ever tech acquisition by a Chinese company.

Lenovo will pay $2.07 billion in cash and the rest with stock of the Beijing-based PC maker, the company said in a statement to the Hong Kong exchange today.

The deal surpasses Baidu’s acquisition of 91 Wireless from NetDragon Websoft for $1.85 billion last year, according to Thomson Reuters data, and underscores the growing clout of the country’s technology firms as they look to expand overseas.

The potential deal comes after IBM missed revenue expectations for the fourth consecutive quarter when it reported earnings earlier this week.

The sale allows IBM to dump its low-margin x86 business - which sells less powerful and slower servers than the company’s higher-margin offerings - and focus on the firm’s decade-long shift to more profitable software and services. The unit had reported seven straight quarters of declining revenue.

“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.”

A deal for IBM’s x86 servers, which power corporate data centres, fits with Lenovo’s attempts to remould itself as a force in mobile devices and data storage servers. It also helps IBM’s shift away from hardware towards software and services.

Reuters had reported on Tuesday that Lenovo had resumed talks to buy the IBM’s lower-margin unit after failing to reach an agreement last year following differences on pricing.

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.

Lenovo said earlier this week that 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.

Recent reports have also indicated that Fujitsu and Dell are also potentially interested in buying the server unit.

The timing of the deal was first reported by the Wall Street Journal, citing sources. (Reuters)