Lenovo in talks to buy IBM unit

Acquiring low-end server business called a win-win deal for both sides

Buying IBM Corp's server unit will help Lenovo Group Ltd to become the biggest x86 server provider in China, as well as a strong global player, industry insiders said.

The comments came after media reports said the Chinese company is close to acquiring IBM's low-end server business after a year of negotiations.

Lenovo said on Tuesday it is in "preliminary talks" on a possible acquisition, but it did not identify the target.

But the Beijing-based company is eyeing IBM's server arm and the companies are likely to sign the deal "within weeks", Bloomberg News reported, citing an unidentified source.

It will be a win-win deal for both sides, especially Lenovo, which is eager to build a stronger server production line, analysts said.

"Lenovo expects x86 servers to drive top-line and bottom-line growth, because x86 servers still offer higher margins than personal computers," said Gene Cao, senior analyst at industry consultancy Forrester Research Inc.

"Lenovo intends to improve its capability in providing high-end x86 servers, such as four-socket servers, which can be directly improved through the acquisitions," according to Cao.

"The acquisition will definitely help our business because the unit from IBM will give us more resources in terms of hardware manufacturing," said a manager at Lenovo's server arm, who declined to be identified.

"A stronger manufacturing capability and the existing partnership with EMC Corp will give Lenovo a bigger market share in China," he said.

United States-based manufacturer Dell Inc was the top server provider in China as of the third quarter. Dell held more than 20 percent of the nation's x86 server market at that point, according to IDC.

In 2012, Lenovo and US-based data storage company EMC formed a joint venture to develop server and storage equipment.

The joint venture mainly targets Chinese customers, though it might expand to West Europe and Russia by 2016.

Purchasing the IBM asset will not have any impact on Lenovo's existing cooperation with EMC, said Cao.

"The Lenovo-EMC joint venture will continue to focus on the storage market. Lenovo will continue to play the role of an original equipment manufacturer and reseller of EMC's storage products and solutions in China," he added.

The Chinese company may also look at the overseas server market if the potential acquisition goes well.

IBM has a fairly large base of x86 server customers and a large channel network outside China.

Lenovo has long been in pursuit of IBM's server segment. Last year, the companies failed to agree on the price of the unit, which was valued at about $5 billion.

"Lenovo may offer a bit better price than they proposed half a year ago to seal the deal," said Cao.

The Beijing-based company has been vigorously building a presence outside the PC sector after it overtook Hewlett-Packard Co in 2012 to become the world's largest PC vendor.

The company said it is challenging Apple Inc and Samsung Electronics Co in the consumer electronics sector.

Lenovo acquired IBM's PC unit in 2005 in a $1.25 billion stock and cash deal. The purchase was a critical step in the company's rise to the top of the global PC market.

Lenovo shares closed at HK$10.46 ($1.35) Tuesday, up 2.75 percent, on talk of the possible deal.