Lenovo Group Ltd. (992), the Chinese personal-computer maker, is the most likely bidder for parts of International Business Machines Corp. (IBM) (IBM)’s server division, a person familiar with the matter said.
The business, which sells servers running x86 processors, may fetch $2.5 billion to $4.5 billion depending on what assets and liabilities are included, said the person, who asked to not be named because the talks are private. An agreement may still be several weeks away, the person said. Lenovo shares surged 9.5 percent on the news.
Lenovo used the 2005 purchase of IBM’s PC unit as a steppingstone to become the world’s second-largest producer. Now it’s diversifying into other products, such as tablets and smartphones, and allied itself with EMC Corp (EMC). last year to boost sales of storage equipment and servers that run corporate networks. Buying IBM’s business would further bolster its capabilities, said Alberto Moel, an analyst at Sanford C. Bernstein & Co. in Hong Kong.
“Low-cost servers are the fastest-growing, most attractive area of the server business right now, so this would make sense,” Moel said. “This is consistent with Lenovo’s strategy of moving into things that are growing and going new places.”
Lenovo rose to HK$7.06 in Hong Kong trading, the largest gain since Sept. 27, 2011. The shares are up less than 1 percent this year, compared with the 2.8 percent decline in the benchmark Hang Seng Index. IBM, meanwhile, dropped 8.3 percent to $190 at the close in New York.
Cloud computing -- which lets customers access software online, rather than storing it locally -- is increasingly popular. That’s spurring demand for low-cost, energy-efficient servers among companies with large data centers, including Amazon.com (AMZN) Inc., Google Inc. and Facebook Inc. (FB), Moel said.
IBM’s low-end server business could be a “good fit” at Lenovo, said Laurence Balter, an analyst at Oracle Investment Research in Fox Island, Washington. The machines, which store corporate data and run computing functions, rely on x86 chips -- similar to the processors used in PCs.
“It’s underperforming because of the cost of doing business on IBM’s side,” he said. “Lenovo probably did the calculations and said, ‘Well, we can make more because IBM’s cost of doing business is so much higher.’”
Lenovo is now the second-biggest PC maker behind Hewlett- Packard Co (HPQ). It was the only top-five manufacturer not to see a drop in shipments last quarter, according to research firm IDC.
The talks were previously reported in CRN, a publication aimed at technology integrators. In response to the story, Lenovo said it was in “preliminary” discussions about a potential acquisition with a third party, which it didn’t name.
“No material terms concerning the potential acquisition have been agreed and the company has not entered into any definitive agreement,” Lenovo said in the statement.
Jeffrey Shafer, a Lenovo spokesman, said in an e-mail he had no additional comment beyond that statement.
IBM Chief Financial Officer Mark Loughridge said on his company’s earnings call that he wouldn’t comment on rumors. Ed Barbini, a spokesman for Armonk, New York-based IBM, also declined to comment on the Lenovo talks.
Profit at IBM’s low-end service business has been “underperforming” compared with other parts of its hardware unit, the company said in a presentation to investors in February. Revenue for the System X business, which sells x86 servers, declined 9 percent in the first quarter, IBM said. Even so, the company’s total hardware revenue fell more sharply, dropping 17 percent to $3.1 billion.
The company said it would take “substantial actions” to improve the business. A combination of divestitures, job cuts and acquisitions will result in charges in the second quarter and gains in the second half, Loughridge said.
“The low-end server division was a drag, subtracting economic value from Big Blue,” Balter said. “It is a painful but smart move in the long run.”