Transfer Pricing Associates

Why is Lenovo investing in IBM again?

post Tuesday February 4, 2014

Money - dollars

After failed negotiations about a deal to buy a low-end server unit of International Business Machines (IBM) in 2012, China’s Lenovo Group Ltd is trying to reach an agreement with the American tech giant again. Last year, the deal was blown off, because of a disagreement about the price. IBM asked for a price between $4 billion to $6 billion for the unit and Lenovo was said to be willing to pay only $2.5 billion. IBM has been very successful in the past and Lenovo is hoping to diversify and grow with this purchase in a decreasing PC market.

Leonovo’s purchase of IBM’s Thinkpad in 2005 for $1.75 billion was the beginning of a race to the top of the global PC market. The low-end server units Lenovo is buying are crucial  into becoming an even bigger player on the market of mobile devices and data storage servers. The units enable Lenovo to store even more data and it will even double its total capacity of business servers.

In the fourth quarter of 2013, IBM’s revenue decreased by 5.5 percent to $27.7 billion. IBM's x86 server sales declined by 16 percent in the fourth fiscal quarter alone. Lenovo and IBM announced that they have signed a definitive agreement that will see the Chinese hardware giant acquire the IBM's x86 server business for $2.3bn, with approximately $2bn to be paid in cash and the balance in Lenovo stock. That would make it the biggest ever deal in China's IT sector. The deal includes the following:

Additionally, Lenovo gets all of the development, sales and marketing, finance, legal, integrated supply chain, operations, IT, manufacturing, and service and support (maintenance) operations associated with the aforementioned assets. Furthermore, IBM’s Systems and Technology Group general manager for System x and Pure Systems, Adalio Sanchez, will move to Lenovo.

The acquisition is expected to close later in 2014, pending regulatory approval.
IBM is following the money and the market trends. IBM's server business is the world's second-largest. According to Gartner, IBM has a 22.9 percent share of the $12.3 billion market in the third quarter of 2013.

The deal will benefit both parties. Peter Hortensius, senior vice president at Lenovo and president of its Think Business Group stated that the acquisition of IBM's x86 server portfolio will enable Lenovo to increase its current 2 percent niche market to 14 percent. Steve Mills, IBM senior vice president and group executive of the Software & Systems Group said: "The divestiture [of the x86 server line] allows IBM to focus on system and software innovations ... such as cognitive computing, Big Data and cloud,"

Source: Reuters, ZDNet, Ecommerce Times  
Image courtesy of Ddpavumba /
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