Lenovo-IBM Deal: Still Life Left
Media are buzzing today with word that talks have broken down in a landmark deal that would see PC giant Lenovo (HKEx: 992) buy the low-end server business from IBM (NYSE: IBM), in a multibillion dollar deal that would have been Lenovo’s largest purchase ever. But my observation from years of reporting this kind of deal is that the story isn’t over yet, and this disagreement is just a negotiating ploy by both sides before they resume their talks and reach a deal. The reason is simple: both sides want to see this deal happen, because it makes too much strategic sense for either to abandon.
Let’s start by looking at the latest media reports, which say that talks in the deal for Lenovo to buy IBM’s x86 server hardware unit have collapsed over disagreement about valuation. (English article; Chinese article) The latest reports come just 2 weeks after media first broke the news of the negotiations, which appear to have been leaked by IBM. (previous post)
The original reports cited several unnamed sources saying IBM wanted to exit the low-end server business as part of its broader move away from hardware manufacturing to more lucrative information technology (IT) services. Such a move would follow IBM’s earlier sale of its PC business to Lenovo in 2005 for $1.25 billion.
At the time of the earlier reports, the sources said that IBM was reportedly seeking $5-$6 billion for the server unit. I observed that the figure was probably an optimistic one being leaked by IBM sources, and that the final price would probably be quite a bit lower. Now it appears from these latest reports that Lenovo indeed doesn’t want to pay such a big premium for a relatively profitable business that would complement its current product line but still looks expensive at IBM’s asking price.
This so-called “collapse” of talks looks strikingly similar to another recent deal involving a tie-up between Internet giants Alibaba and Sina (Nasdaq: SINA). That story saw media first report late last year that Alibaba was in talks to buy a stake in Sina’s popular Weibo microblogging service. Such a deal looked smart for both companies, as it would allow Alibaba to offer its popular e-commerce services to Sina Weibo’s huge pool of 500 million registered users.
But then the negotiations reportedly stalled over price, and all media reports went quiet until earlier this week when the 2 sides suddenly announced a deal. (previous post) My observation was that this deal was just too good for either side to ignore, and it does indeed appear that Alibaba may have made some price concessions. In the end, the deal valued Weibo at about the same level as Sina’s overall market value.
So let’s return now to Lenovo and IBM, which find themselves in a similar situation because this deal simply looks too good for either to abandon. As I’ve said above, IBM wants to get rid of the server business because it’s too low-end and hardware oriented. Lenovo wants to pick up the unit to complement its relatively low-end PC business and help its own move into IT services. What’s more, the acquisition looks geographically attractive since the IBM server business is located near Lenovo’s US headquarters, where it is trying to develop its higher-end PC business.
At the end of the day, I would expect a cooling off period to follow this breakdown in negotiations, which could last up to several weeks while each company decides what it wants to do next. That will be followed by a return to the bargaining table, probably by the end of the month, with the result that we should see the announcement of a deal in perhaps the $3-$4 billion range sometime in late May or June.
Bottom line: The halt in IBM’s plan to sell its low-end server business to Lenovo is only temporary, and talks will resume soon with a deal likely by June.
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This article was first published in the online edition of the South China Morning Post at www.scmp.com.
