Lenovo Group Ltd. (992) will pay International Business Machines Corp. (IBM) a fee that’s more than double the typical size should it fail to acquire IBM’s low-end server unit, people familiar with the matter said.
Lenovo agreed to pay a reverse breakup fee of 8 percent to 9 percent of the $2.3 billion purchase price, or about $200 million, one of the people said, asking not to be identified because the details are private. Such fees, where a buyer agrees to compensate the seller for not closing a deal, are typically about 3.5 percent, data compiled by Bloomberg show.
The size of the fee highlights the risk Lenovo agreed to bear for its largest-ever purchase ahead of a probable national-security review by the U.S. government. While IBM and Lenovo expect to clear any regulatory hurdles, they are prepared for the U.S. to ask for concessions before approving the transaction, the people said.
IBM demanded a higher-than-standard fee from Lenovo, saying it would continue discussions with prospective bidder Fujitsu Ltd. if the Chinese company refused to accept the terms, one person said. Fujitsu expressed a willingness to pay more than the $2.3 billion Lenovo offered, though it wasn’t yet ready to make a firm bid, a person familiar with the matter said Jan. 24.
Lenovo shares rose 4.6 percent to HK$10.96 in Hong Kong, reaching the highest closing price since April 2000. IBM was little changed in New York trading, closing at $176.40.
Lenovo, which started talks to acquire the server business a year ago, walked away after IBM failed to meet its price expectations, Chief Financial Officer Wong Wai Ming said in a Jan. 23 interview. When the Chinese computer maker resumed discussions in November, the situation had turned in its favor as IBM’s outlook for hardware sales worsened, especially in Lenovo’s home base of China.
Brion Tingler, a spokesman for Lenovo, said the company doesn’t disclose information on the break fee. Jeff Cross, a spokesman for IBM, said the company wouldn’t comment on the deal deliberations.
In 151 deals worth at least $1 billion in the past five years where reverse breakup fees were disclosed, the median fee was 3.5 percent of a transaction’s enterprise value, which includes net debt, according to data compiled by Bloomberg.
Early in the negotiations, Lenovo hired lawyers to advise on a probable review by the inter-agency Committee on Foreign Investment in the United States, two people familiar with the matter said. The group reviews purchases of U.S. assets by foreign companies for potential national-security risks.
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Regulators may ask Lenovo to give up some U.S. government contracts, including the more profitable maintenance services, two of the people said. About 10 percent of the server unit’s $4.7 billion annual revenue comes from services, Lenovo Chief Financial Officer Wong Wai Ming told analysts on a conference call last week. Profit margins from selling services are about three times higher than for hardware, he said.
Christopher Padilla, IBM’s vice president for government programs, said in a Jan. 23 interview the company is “quite confident” the deal will be cleared by regulators. The U.S. government cleared Lenovo’s $1.75 billion purchase of IBM’s personal-computer business in 2005 after a monthlong investigation.