(Corrects headline and paragraph 1 to add "low-end")
* Lenovo paying $2.07 bln in cash, rest in stock
* IBM's unit made $26.4 mln loss after in 12 months ended
* Deal subject to regulatory approval
BEIJING, Jan 23 Lenovo Group Ltd has
agreed to buy IBM Corp's low-end server business for
$2.3 billion as the Chinese PC giant grabs another piece of the
computing world in a long-awaited deal.
The acquisition comes nearly a decade after Beijing-based
Lenovo bought International Business Machines's (IBM)
loss-making ThinkPad business for $1.75 billion, eventually
becoming the world leader in personal computers in 2012.
But with the PC business now under siege in the face of
powerful smartphones and super-fast tablets, Lenovo is
diversifying its revenue and remodelling itself as a force in
mobile devices and data storage servers.
The acquisition of the IBM unit, still subject to approval
from the Committee on Foreign Investment in the United States
(CFIUS), would lift Lenovo's market share in the server market
to 14 percent from 2 percent currently, said Peter Hortensius,
senior vice-president at Lenovo and president of its Think
Before that happens, Lenovo has to turn the server unit
around. The low-margin business - which sells less powerful and
slower x86 servers than IBM's other higher-margin offerings -
has posted seven quarters of losses as more clients switch to
cloud storage from traditional infrastructure.
"We will do a variety of things, improve products, drive
improved costs, and couple it with the scale we have and our PC
business to improve go-to-market," Hortensius told Reuters on
Thursday after the deal was announced.
Analysts say Lenovo will likely find it easier than IBM to
sell the x86 servers to Chinese companies as Beijing tries to
localise its IT purchases in the wake of revelations about U.S.
Lenovo said it expects demand for computing power and
recovery of global enterprise spending to further drive growth
in the x86 server market.
Lenovo has agreed to pay $2.07 billion in cash and the rest
with stock of the Hong Kong-listed PC maker, in a deal set to be
China's biggest-ever technology M&A.
The deal surpasses Baidu Inc's $1.85 billion
acquisition of 91 Wireless from NetDragon Websoft Inc
last year, according to Thomson Reuters data, and underscores
the growing clout of the country's technology firms as they look
to expand overseas.
For IBM, the sale allows the company to focus on its
decade-long shift to more profitable software and services.
"What the business is worth to IBM is no longer relevant.
The only thing that matters is what it's worth to Lenovo," said
Alberto Moel, a Hong Kong-based analyst at Sanford C. Bernstein.
"If Lenovo can improve the margins... that could offset any
continued revenue shrinkage."
The unit posted a $26.4 million loss after tax for the 12
months ended Dec. 31, compared with a $187 million profit in the
12 months ended March 2013.
The x86 unit has annual revenues of $4.6 billion, Lenovo
Talks between IBM and Lenovo fell apart last year due to
differences over pricing, with media reports at the time
suggesting IBM wanted as much as $6 billion for the unit.
Analysts said the sale may have been accelerated by IBM's
China woes and ongoing weakness in hardware sales, after the
world's biggest technology services company reported a 23
percent drop in fourth-quarter revenue from China on Tuesday.
Lenovo's purchase of IBM's PC business in 2005 became the
springboard for its leap to the top of global PC maker rankings,
and the market is betting Lenovo will enjoy similar success with
its latest acquisition, which is partly reflected in a 9.44
percent rise in its shares this year. The broader Hang Seng
index is down 2.5 percent in the same period.
IBM's server business was the world's second-largest, with a
22.9 percent share of the $12.3 billion market in the third
quarter of 2013, according to technology research firm Gartner.
Hewlett-Packard Co is the biggest player, while
Lenovo does not appear in the top five.
"The acquisition presents a unique opportunity for the
company to gain immediate scale and credibility in this market,"
Lenovo said in a statement on Thursday.
Credit Suisse and Goldman Sachs Group
advised Lenovo, the PC maker said.
(Reporting by Paul Carsten; Editing by Denny Thomas, Stephen
Coates and Ryan Woo)