Lenovo edges close to IBM server deal

Computer company seeks to beef up profit drivers with $2.1b acquisition

Lenovo Group Ltd said it will close the acquisition of IBM Corp's x86 server division by Wednesday, giving the Chinese tech company another profit driver in the post-personal computer era.

The acquisition is expected to give Lenovo more flexibility in the global enterprise market, something that the world's biggest personal computer maker has been eyeing for a long time.

Yang Yuanqing, chief executive of Lenovo, said the purchase of the x86 server unit will help the company expand in the enterprise market.

"Although we have been doing for-enterprise business for years, the company remains a small player on global stage. The acquisition has enhanced our capabilities around the globe," said Yang.

Lenovo is anticipating $5 billion revenue from its new server unit in the first year after the buyout, according to Yang.

After purchasing the x86 business from IBM, Lenovo will become the world's third-biggest server vendor by market share behind Hewlett-Packard Co and Dell Inc.

Yang said Lenovo is ready to challenge HP and Dell, although the United States-based companies were able to "steal" former IBM users over the past few months. Lenovo's major server market will remain in China after the deal, he said.

Gene Cao, senior analyst at Forrester Research Inc, said: "Lenovo is planning to build the enterprise infrastructure, including servers and storage, which primarily focuses on the enterprise market in both domestic and overseas markets."

The buyout will help Lenovo claim the title as the largest x86 server provider in China and strengthen its brand awareness in the enterprise market, Cao said, adding the Chinese company expects its x86 servers to drive both low- and high-end growth because the products have higher margins than PCs.

According to a report from industry researcher IDC, server demand from the government, telecommunications, electricity and financial sectors on the Chinese mainland has shown a significant rebound this year, providing a bigger growth cushion for Lenovo.

The quarterly x86 server shipment volume in the country is around 350,000 units this year, representing a roughly 20 percent year-on-year growth.

The factory revenue of x86 servers in the first quarter exceeded $1 billion, a 24.5 percent growth year-on-year, said IDC.

Spending approximately $200 million less than the initial price, Lenovo is using $2.1 billion to acquire IBM's System x, BladeCenter blade servers, blade networking and maintenance operations and a number of software products. IBM will retain its System z mainframes and the Power architecture-based server product line.

Lower expenses from Lenovo were because of changes in the valuation of inventory and deferred revenue liability, the company said.

Approximately $1.8 billion will be paid in cash, and the rest will be paid in Lenovo stock, according to the agreement between the two companies.

About 6,500 IBM employees in 34 research and development centers and seven manufacturing locations around the world will join Lenovo after the deal closes, said the company.

IBM, however, is not withdrawing from the Chinese server market after it sells the x86 assets. It has joined with Chinese server vendor Inspur Co Ltd to develop Power-based servers.

Inspur, headquartered in Shandong province, is quickly expanding its businesses in government-procurement sector where overseas-made servers are being gradually replaced due to security concerns.

Lenovo is known to build new business units using major acquisitions. In 2005, it spent $1.75 billion to acquire the personal computer business of IBM. The buyout eventually helped Lenovo become the leading PC vendor in the world.

The Chinese company is also working on another multibillion-dollar buyout at the moment. It is planning to acquire the Motorola Mobility unit from Google Inc to enrich its smartphone portfolio.