Lenovo strikes $2.3B deal for IBM server business - The Deal Pipeline (SAMPLE CONTENT: NEED AN ID?)
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Lenovo strikes $2.3B deal for IBM server business

by Andrew Bulkeley  |  Published January 23, 2014 at 9:24 AM

The second time can also be a charm: Chinese personal computer maker Lenovo Group Ltd. on Thursday, Jan. 23, agreed to buy the low-power server business of International Business Machines Corp. for $2.3 billion, two days after confirming it had entered talks.

Lenovo, of Beijing, said it would pay about $2 billion in cash and the remainder in shares for IBM's x86 server business as it continues to expand its hardware activities to remain the world's biggest computer maker.

"With the right strategy, great execution, continued innovation and a clear commitment to the x86 industry, we are confident that we can grow this business successfully for the long-term," said Lenovo chairman and CEO Yang Yuanqing in a statement.

Lenovo has used acquisitions to surpass rivals such as Dell Inc. and Hewlett-Packard Co. in the personal computer space. The surge began with the $1.8 billion purchase of IBM's personal computer division in 2005. In 2011 it expanded with the $660 million purchase of German computer maker Medion AG.

The Chinese buyer said it expected to take on 7,500 current IBM employees in Raleigh, N.C., Shanghai, Shenzhen and Taipei. The successful offer follows talks last year that ended when the companies couldn't agree on a price.

The auction reportedly also caught the interest of Tokyo-based Fujitsu Ltd. and Round Rock, Texas-based Dell.

IBM is moving away from its traditional hardware business to focus on experimental technologies and cloud-based products, which allow users to store files and data at remote locations. The files and data can then be accessed from nearly any device anywhere in the world.

The Armonk, N.Y.-based seller said it will invest $1.2 billion to expand its global cloud computing business and another $1 billion to develop its Watson experimental computing activities.

Unloading the low-power server business will allow the company to focus on more profitable businesses. In the final quarter of 2013, sales at its server business slipped 26% over the fourth quarter of 2012 to $4.3 billion. Overall, sales fell 5% at the company at the end of 2013 to $27.7 billion.

Lenovo shares closed 1%, or HK$0.14, lower at HK$10.32 ($1.30) in Hong Kong.

The deal is likely to trigger a review by the Committee on Foreign Investment in the U.S., which has recently played a critical role in several high-profile deals involving China. The panel, best known as CFIUS, cleared Lenovo's initial purchase of IBM's PCs but may take a different view on servers since they are also used by government agencies or sometimes placed near sensitive government and military sites.

CFIUS' biggest concern is keeping espionage technology out of seemingly benign equipment. It recently required Softbank Corp. to restrict the purchase of third-party technology it might otherwise buy from China's Huawei Technologies Co. Ltd. as a condition of its $20 billion acquisition of a majority of Sprint Corp.

The committee has always been wary of Huawei, which in 2011 decided to unwind the completed acquisition of part of server developer 3Leaf Systems Inc. after CFIUS objections.

After repeated defeats, Huawei last year said it would no longer try to buy into the U.S. - the government has accused the company of close links with China's military.

Lenovo turned to Goldman Sachs Group Inc. and Credit Suisse Group for financial advice with Cleary Gottlieb Steen & Hamilton LLP providing counsel.

IBM took financial advice from Bank of America Merrill Lynch with counsel provided by Cravath, Swaine & Moore LLP.

Tags: 3Leaf Systems Inc. | CFIUS | Dell Inc. | Hewlett-Packard Co. | Huawei Technologies Co. Ltd. | IBM Corp. | Lenovo Group Ltd. | low-power servers | Medion AG | PCs | Softbank Corp. | x86 server | Yang Yuanqing

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Andrew Bulkeley

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