Lenovo Group Ltd. (992) is in discussions to acquire International Business Machines Corp. (IBM:US)’s low-end server business, and a deal may be signed within weeks, according to a person with direct knowledge of the matter.
Lenovo has completed due diligence, according to the person, who asked not to be identified because the talks are private. The companies failed to agree last year on a price for the assets, estimated to be worth $2.5 billion to $4.5 billion. Lenovo said it’s in preliminary talks on a possible acquisition without identifying the target or seller. The stock rose.
IBM is getting rid of businesses (IBM:US) with lower profit margins and focusing on software and services to reverse slumping sales. Lenovo, which began its rise to leadership of the global personal-computer market by acquiring IBM’s unit in 2005, is looking to counter falling industry shipments by expanding into storage equipment and the servers that run corporate networks.
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“This transaction would make sense for both parties,” said Alberto Moel, an analyst at Sanford C. Bernstein & Co. in Hong Kong. “The logic was there and that hasn’t changed.”
Brion Tingler, a New York-based spokesman for Lenovo, declined to comment. Anthony Guerrieri, a Shanghai-based spokesman for IBM, said the company “does not comment on rumors or speculation.”
Lenovo is only in talks to acquire the x86 server hardware business and not services, and a deal could be signed within a week, the person said. The person didn’t have details on the current price or structure of the proposed deal.
Lenovo, which has its headquarters in Beijing and Morrisville, North Carolina, rose 2.8 percent to HK$10.46 at the close of trade in Hong Kong. Shares of Armonk, New York-based IBM have advanced 1.3 percent this year after dropping 2.1 percent in 2013.
A sale would continue IBM’s campaign to exit hardware businesses. Since selling the PC division, it has divested units such as printers and retail-store systems. IBM’s businesses also include storage computers and semiconductors.
In October, IBM reported sales fell for the sixth straight quarter on slowing demand for hardware. The company lost $713 million in its hardware business in the first nine months of last year, compared with $253 million in profit in the year-earlier period. That may have added pressure for IBM to sell the server unit, said Stephen Yang, a Hong Kong-based analyst at Sun Hung Kai Financial.
“Last quarter IBM server sales were very weak,” Yang said. “IBM may be looking to cut losses before the erosion gets worse.”
The purchase of IBM’s PC business in 2005 vaulted Lenovo from the No. 8 maker at the time to third. After the acquisition, Lenovo also bought control of Germany’s Medion AG and NEC Corp.’s PC division in Japan.
Those purchases helped Lenovo overtake Hewlett-Packard Co. for the top spot in PC shipments in the second quarter of last year. Lenovo kept that spot with 18.1 percent market share in the fourth quarter, helped by a 6.6 percent increase in shipments, researcher Gartner Inc. reported this month.
Lenovo Chief Executive Officer Yang Yuanqing has said he’s now looking for acquisitions to expand beyond that core PC business. Yang wants to double Lenovo’s share of the server market within three years to complement the company’s development into the No. 2 smartphone vendor in China behind Samsung Electronics Co.
“Lenovo has been trying to break into servers for a while as a new growth engine,” Moel said. “It could be good for Lenovo based on the right price.”
Talks with IBM for Lenovo to buy parts of the server division broke down after the two sides couldn’t agree on a price, a person familiar with the discussions said May 3. Lenovo wanted to pay toward the low end of the $2.5 billion-to-$4.5 billion range that was being discussed for the assets, while IBM had sought a higher valuation, Bloomberg reported at the time.
The Wall Street Journal reported Jan. 19 that Dell Inc. was looking at IBM’s low-end server business.
Lenovo had net cash reserves of $2.6 billion as of Sept. 30, the company reported in November.
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