Lenovo Closes Deal For IBM’s x86 Server Business

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The long-rumored deal between Lenovo Group Limited (ADR) (OTCMKTS:LNVGY) (HKG:0992) and International Business Machines Corp. (NYSE:IBM) for IBM’s x86 server business has finally come to fruition. Big Blue sold its ThinkPad PC division to Lenovo almost a decade ago, and analysts had been saying the two were likely to ink a deal for the tech titan’s server business for a number of years.

International Business Machines Corp. (NYSE:IBM) holds on to its high-end server systems business and will continue to work with Lenovo Group Limited (ADR) (OTCMKTS:LNVGY) (HKG:0992) to develop software for the x86 platform.

Lenovo is planning to offer jobs to the 7,500 IBM employees of the x86 division and is also taking over customer service and maintenance operations.

Deal price close to estimates

Stifel Technology released an industry update research note on the Lenovo Group Limited (ADR) (OTCMKTS:LNVGY) (HKG:0992)/International Business Machines Corp. (NYSE:IBM) deal today. Stifel analysts Aaron C. Rakers and colleagues offer an overview on the deal and price. “Lenovo has announced the definitive agreement to acquire IBM’s x86 server business for a purchase price of ~$2.3 billion ($2.07 billion cash and 182 million Lenovo shares). As we had previously reported, we estimate IBM’s System x (x86) server division to have generated approximately $4.3 billion in revenue during 2013, a decline from $5.1 billion and $4.9 billion generated in 2011 and 2012, respectively. This would equate to a purchase price at ~0.5x revenue and compares to estimates earlier this week that the purchase price would be in the sub-$2.5 billion range.”

Gutsy move for Lenovo

Even though Lenovo Group Limited (ADR) (OTCMKTS:LNVGY) (HKG:0992 apparently got a pretty good deal price-wise, they still have to turn around a server division that has operated at a loss for seven consecutive quarters in a highly competitive market. Stifel’s analysts point out this is a risky move for Lenovo as the low-end server market also faces structural issues as more and more businesses turn to cloud data storage. However, they also point out China-based Lenovo will almost certainly have more success selling servers to Chinese companies given recent revelations about widespread electronic snooping by the U.S.

Deal still requires regulatory approval

This type of large deal involving high-tech equipment manufacturing does require the approval of U.S. regulators, but experts says the deal does not look to face major stumbling blocks. “It’s fair to say that this deal is more likely to get through CFIUS without major problems than the 2005 transaction,” said John Reynolds, who heads the regulatory practice at law firm Davis Polk & Wardwell in Washington, D.C. and has 20 years of experience dealing with CFIUS.

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