Lenovo Eyes IBM Server Unit
It’s been at least a few weeks since the last major M&A rumor involving Lenovo (HKEx: 992), so it seems only appropriate that the acquisitive PC giant is back in the headlines with word of its latest bid for a major global asset. This time the target is the server business of global IT services giant IBM (NYSE: IBM). (English article) Such a move would certainly make sense for IBM, which continues its drive to exit the hardware manufacturing business after the landmark sale of its PC business to Lenovo back in 2005. I’m less certain about the wisdom of the move for Lenovo, although it’s certainly consistent with the company’s pattern of snapping up a steady stream of global hardware assets since the original IBM deal.The latest media reports say that Lenovo wants to buy IBM’s x86 server business, in a major deal that has IBM seeking up to $6 billion for the unit. (English article) Several potential buyers previously expressed interest in the purchase, but Lenovo is reportedly the only one left at this stage. I suspect the reported $5-$6 billion price tag is wishful thinking by IBM, and the final number could be significantly lower if the 2 sides reach a deal.
Still, a deal of this size would mark the largest global M&A to date for Lenovo, whose $1.25 billion of IBM’s PC business in 2005 began a global march that saw the company become the world’s biggest PC seller for a brief period last year. I have to admit that I don’t know too much about the server business. But that said, the relatively high price for this particular deal probably reflects the fact that the business is profitable for IBM, and that servers themselves have a better future than traditional PCs that are probably destined for extinction in the next decade.
Lenovo hasn’t confirmed any specific talks, but did issue a statement saying it was in “preliminary” negotiations with an unnamed company for a potential acquisition. Clearly the 2 sides have a differing view on how advanced the talks really are, since media reports say the talks are quite advanced and IBM has even informed employees at its server product engineering lab that they will work for Lenovo as of June. From a geographic perspective such a deal would certainly be convenient, since Lenovo’s US headquarters, acquired from the earlier IBM deal, is quite near the IBM server business in the state of North Carolina.
This new deal would come on the heels of a steady string of acquisitions by Lenovo, including the latest that saw rumors emerge early this month that the company might buy the smartphone business from Japan’s NEC (Tokyo: 6701). (previous post) The company has also made other major PC acquisitions over the last 2 years in Brazil, Germany and Japan, and formed a major new tie-up with global computer storage giant EMC (NYSE: EMC).
This latest deal admittedly does appear to make strategic sense, since servers are a product with a good future and one where Lenovo currently lacks a major portfolio. Lenovo has also decided its future lies in hardware rather than IT services, as reflected by its recent decisions to get into every kind of computing product imagineable, from PCs, to cellphones, Internet TV and gaming consoles.
My major concern, which I’ve previously expressed, is that the company is buying too many major global assets too quickly and could soon experience some major integration headaches. Even the best run companies seldom do more than 1 major M&A deal every 2 or 3 years, and even then they often experience big integration issues. This latest deal would most likely be the biggest in Lenovo’s history, leaving the company with yet another major ball to juggle as it tries to position itself as a global computing giant with solid long-term prospects.
Bottom line: Lenovo’s purchase of IBM’s server business looks smart strategically, but could pose integration challenges due to Lenovo’s extensive M&A in the last 2 years.
Related postings:
