Lenovo to Buy IBMs Lowend Server Business for 23 Billion

Lenovo to Buy IBM's Low-end Server Business for $2.3 Billion

The deal, however, could face hurdles before it is completed as U.S. regulators are likely to closely scrutinize any acquisition of local companies by Chinese firms owing to national security concerns.

HONG KONG -- Giving it a platform to compete in that low-end server business sector with Dell  (IW 1000/75) and Hewlett-Packard (IW 1000/28), Lenovo (IW 1000/134) will buy IBM's low-end server business for $2.3 billion, it said Thursday.

IBM (IW 1000/34) will receive $2.07 billion in cash and the rest in shares for the x86 business,  in a deal that would help the Chinese firm diversify away from the slumping market for PCs.

IBM will still provide maintenance on behalf of Lenovo, while some 7,500 members of staff worldwide will be offered employment by the Chinese company, according to a statement from the American technology giant.

The deal comes after Lenovo bought IBM’s PC business for $1.75 billion in 2005, in a landmark deal that showcased Chinese companies' efforts to expand overseas. Thursday's announcement comes after Lenovo and IBM resumed talks on a buy-out of the U.S. firm's low-end server business that had broken down last year over differences in price.

Lenovo, which according to surveys has become the largest vendor of PCs, is keen to diversify its business at a time when consumers are increasingly turning to portable computing technology.

Sales of personal computers fell 10% in the Asia Pacific last year due to sluggish economic growth and stiff competition from smartphones and tablets, the International Data Corp. said this week. IDC said sales of PCs fell to 108 million units in the Asia Pacific outside Japan, marking the region's first annual double digit decline.

"This acquisition demonstrates our willingness to invest in businesses that can help fuel profitable growth and extend our PC Plus strategy," Lenovo CEO and chairman Yang Yuanqing said in a statement.

IBM, meanwhile, said the money generated from the sale of their low-end server business could be put towards research and development of new products.

"This divestiture allows IBM to focus on system and software innovations that bring new kinds of value to strategic areas of our business, such as cognitive computing, Big Data and cloud," said Steve Mills, an IBM vice president.

The deal, however, could face hurdles before it is completed as U.S. regulators are likely to closely scrutinize any acquisition of local companies by Chinese firms owing to national security concerns. When Lenovo bought IBM's PC business in 2005, the $1.25 billion deal came under scrutiny by the Congress and the Committee on Foreign Investment, before it was approved.

"There may be national security risks, depending on where and how the servers are used," Jonathan Gafni told Dow Jones Newswires. Gafni, president of consultancy Compass Point Analytics, was formerly associated with the US government committee that reviews foreign acquisitions on national security grounds.

Bids by Chinese companies to expand in the technology sector in the United States have faced hurdles in the past. In 2012, a congressional committee said Chinese telecom firms Huawei and ZTE should be excluded from government contracts because their equipment could be used to spy.

The US, in the same year, also barred Chinese engineering giant Sany from a multi-million-dollar wind farm project in Oregon on national security concerns.

Copyright Agence France-Presse, 2014

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