Lenovo, IBM Talks on Server Deal Said to Break Down

International Business Machines Corp. (IBM)’s negotiations to sell parts of its server division to Lenovo Group Ltd. (992) broke down after the two sides couldn’t agree on a price, said a person familiar with the discussions.

Lenovo Chief Financial Officer Wong Wai Ming, who was in the U.S. this past week for the talks, left for Hong Kong without an agreement, said the person, who declined to be identified because negotiations are private. The talks could resume later, the person said. James Sciales, a spokesman for IBM, and Jeffrey Shafer, a spokesman for Lenovo, both declined to comment.

Lenovo wanted to pay toward the low end of the $2.5 billion-to-$4.5 billion range that Bloomberg News reported on April 19, while Armonk, New York-based IBM sought a substantially higher valuation, the person said, without providing details. In 2005, Lenovo purchased IBM’s personal- computer unit, which helped make the Beijing-based company the world’s second-largest PC manufacturer. The servers rely on similar x86 processors.

The breakdown of talks was reported by Fortune on May 1. Lenovo shares fell 2.7 percent to HK$6.90 yesterday in Hong Kong. IBM rose 1.4 percent to $202.39 in New York.

Hardware Trouble

IBM was looking to divest a portion of its business with lower profit as it seeks earnings per share of $20 by 2015, compared with $15.25 last year. The company has had trouble selling its hardware products, with a 17 percent drop in the unit’s revenue last quarter.

Photographer: Simon Dawson/Bloomberg

Wong Wai Ming, chief financial officer of Lenovo Group Ltd. Close

Wong Wai Ming, chief financial officer of Lenovo Group Ltd.

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Photographer: Simon Dawson/Bloomberg

Wong Wai Ming, chief financial officer of Lenovo Group Ltd.

On an April 18 conference call with analysts, IBM Chief Financial Officer Mark Loughridge said cutting jobs and buying and selling businesses would lead to charges in the second quarter -- about $1 billion due to restructuring. He said that gains in the second half from those activities would make up for those expenses.

The comments probably meant that a divestiture was planned that would be worth more than $1 billion, said Maynard Um, an analyst at Wells Fargo Securities in New York.

Lenovo is diversifying into devices -- including TVs, tablet computers and smartphones -- and allied itself with EMC Corp. last year to boost sales of storage equipment and servers that run corporate networks.

In an April 19 statement through the Hong Kong stock exchange, Lenovo said it was in “preliminary” discussions about a potential acquisition with a third party, which it didn’t identify.

“No material terms concerning the potential acquisition have been agreed and the company has not entered into any definitive agreement,” Lenovo said in that statement.

Photographer: Scott Eells/Bloomberg

The International Business Machines Corp. (IBM) logo is displayed in front of the company's offices in New York. IBM was looking to divest a portion of its business with lower profit as it seeks earnings per share of $20 by 2015, compared with $15.25 last year. Close

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Photographer: Scott Eells/Bloomberg

The International Business Machines Corp. (IBM) logo is displayed in front of the company's offices in New York. IBM was looking to divest a portion of its business with lower profit as it seeks earnings per share of $20 by 2015, compared with $15.25 last year.

Shafer said yesterday he couldn’t comment on whether Lenovo will issue an update of that filing with the exchange.

To contact Bloomberg News staff for this story: Edmond Lococo in Beijing at elococo@bloomberg.net; Sarah Frier in New York at sfrier1@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

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