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Lenovo in talks to buy IBM low-end server business

Lenovo Group Ltd. is in serious discussions to

Lenovo Group Ltd. is in serious discussions to acquire International Business Machines Corp.’s low-end server business, and a deal may be signed within weeks, according to a person with direct knowledge of the matter. (Jan. 6, 2014) Credit: Getty Images

Lenovo Group Ltd. is in serious discussions to acquire International Business Machines Corp.'s low-end server business, and a deal may be signed within weeks, according to a person with direct knowledge of the matter.

Lenovo, the world's largest personal-computer maker, 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. The person didn't have details on the current price or structure of the proposed deal.

Chief executive Yang Yuanqing said he's looking for acquisitions as Lenovo tries to counter falling global PC shipments by expanding into storage equipment and the servers that run corporate networks. Yang wants to double Lenovo's share of that market within three years to complement the company's development into the No. 2 smartphone vendor in China behind Samsung Electronics Co.

Brion Tingler, a Manhattan-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 if terms are agreed, the person familiar said.

"Lenovo has been trying to break into servers for a while as a new growth engine," said Alberto Moel, an analyst at Sanford C. Bernstein & Co. in Hong Kong. "The logic was there and that hasn't changed in the last eight months. This transaction would make sense for both parties, and it could be good for Lenovo based on the right price."

In October, IBM reported sales fell for the sixth straight quarter on slowing demand for computer 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." Shares of Armonk, New York-based IBM have advanced 1.3 percent this year after dropping 2.1 percent in 2013. The U.S. markets are closed today for a holiday. Lenovo, which has its headquarters in Beijing and Morrisville, North Carolina, rose 1.4 percent to close at HK$10.18 in Hong Kong trading.

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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