30-01-2014, 08:04 #1
[EN] Lenovo Said to Beat Fujitsu to IBM Servers After Dell PassedLenovo Said to Beat Fujitsu to IBM Servers After Dell Passed
By Bloomberg News - Jan 23, 2014
Lenovo Group Ltd., which agreed to buy International Business Machines Corp. (IBM)’s low-end server unit yesterday, beat out prospective bidder Fujitsu Ltd. because that company would have needed several more weeks to conduct due diligence, a person with knowledge of the negotiations 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, said the person, who asked not to be named because the talks were private. Dell Inc., seen as a third potential bidder, was never serious about making an offer, the person said.
IBM, eager to sell the server division amid slumping demand for computer hardware, wanted to complete the deal quickly -- rather than waiting additional time for Fujitsu to finish its review, the person said. Holding out for a better deal could have backfired, especially since the business has been hurting IBM’s performance, said Laurence Balter, chief market strategist at Oracle Investment Research in Maui, Hawaii.
“The longer they waited, the more painful it would be to hold on to that unit,” Balter said in an interview. “The more doors they knock on, the lower the price is going to be.”
Lenovo Chief Executive Officer Yang Yuanqing said he and IBM CEO Ginni Rometty first initiated talks about the server assets one year ago. The time it took to reach agreement is comparable to the length of negotiations for the company’s purchase of IBM’s PC unit, Yang said in an interview yesterday. IBM sold its PC unit to Lenovo in 2005 for $1.25 billion.
Lenovo’s offer was bolstered because it had been pursuing the bid for a year and the company showed patience to get its desired price for the business. When IBM wouldn’t meet Lenovo CFO Wong Wai Ming’s target during talks in the U.S. in April and May, he abruptly got on a plane and flew back to Asia.
“We looked at the assets in the early part of last year, and then the process stopped,” Wong said in an interview yesterday. “Obviously there was some difference in opinion. IBM knew we were interested in the assets and they had made a strategic decision to dispose. We continued to have some contact together.”
Walking away and waiting paid off for Lenovo.
Over the next six months, the situation turned sharply in Lenovo’s favor largely because of IBM’s declining outlook in a key market: Lenovo’s home base of China. IBM’s China sales fell 23 percent in the fourth quarter, following a similar performance in the third quarter, with the largest declines coming in hardware, the company announced this week.
“IBM is losing market share in China’s market and I do not believe they will get it back in the future, as the government and state owned enterprises will buy more local brands like Lenovo,” said Kai Qian, a Beijing-based analyst at China International Capital Corp. “This situation helped prompt IBM to sell the business, and for Lenovo it’s a good time to negotiate with IBM.”
Lenovo’s talks with IBM resumed in November, Wong said.
The $2.3 billion price Lenovo ended up getting was below the bottom end of the range of $2.5 billion to $4.5 billion discussed in the first round of talks.
In addition, the final agreement was broader in scope than the initial discussions, Wong said. The final package included the x86 servers as well as System x, BladeCenter and Flex System blade servers and switches. The agreement also allows Lenovo to assume related customer service and maintenance operations, the companies said yesterday.
Fujitsu had only expressed interest in the server business after the earlier talks between IBM and Lenovo broke down, the person familiar with the matter said. When Lenovo rekindled negotiations in November, it was already months ahead of Fujitsu in the process, culminating in yesterday’s announcement. IBM was concerned that if it waited for Fujitsu and that deal fell through, it would have less leverage going back to Lenovo, the person said.
Brion Tingler, a spokesman for Beijing-based Lenovo, declined to comment on other suitors or competing bids, as did IBM’s Jeff Cross, Dell’s David Frink and Fujitsu’s Sean Nemoto.
While the deal with Lenovo is likely to draw a national-security review by the U.S. government, IBM and Lenovo expect to clear regulatory hurdles. That confidence bolstered IBM’s attitude that Lenovo’s offer was more of a sure thing than Fujitsu’s, the person said. Still, the companies expect regulators to ask for concessions before approving the transaction, and that may include sending some government work to rival companies, according to the person.
“We’re quite confident of a positive outcome,” Christopher Padilla, IBM’s vice president for government programs, said in an interview yesterday. The two companies have been through the process before with the sale of the PC business to Lenovo in 2005. That transaction was cleared after a monthlong investigation.
Fujitsu could have used IBM’s servers, which run on Intel Corp.’s x86 chip technology, to bolster its own x86 lineup. IBM was the third-largest seller of x86 servers in the third quarter, trailing Hewlett-Packard Co. and Dell, according to IDC. It sold $1.21 billion worth of the machines in the period, accounting for 13 percent of the industry’s $9.52 billion total.
While IBM shopped the server division to Dell, that company didn’t want to make a bid, the person said. Dell is struggling with its own sales slump and went private last year after a $24.9 billion buyout.
Under the agreement announced yesterday, Lenovo is offering about $2 billion of cash, with the rest coming in stock. Lenovo also will help resell some IBM equipment. That could give the Armonk, New York-based company fresh inroads into China, a market where it’s seen sales slip, Mark Moskowitz, an analyst at JPMorgan Chase & Co., said in a report.
“Given IBM’s recent weakness in China, we believe Lenovo’s presence in the region could help IBM regain momentum there,” he said.
30-01-2014, 08:10 #2
Lenovo to buy IBM's low-end server unit for $2.3 billionThu, Jan 23 2014
By Paul Carsten and Soham Chatterjee
(Reuters) - Chinese PC maker Lenovo Group Ltd has agreed to buy International Business Machine Corp's low-end server business for $2.3 billion in what would be China's biggest technology deal.
The long-expected acquisition comes nearly a decade after Lenovo bought IBM's money-losing ThinkPad business for $1.75 billion, eventually becoming the world leader in personal computers in 2012.
The sale of the low-end server operation - which still needs U.S. government approval - would allow IBM to focus on its decade-long shift to more profitable software and services.
The deal would increase Lenovo's share in the server market to 14 percent from 2 percent, said Peter Hortensius, a senior vice-president at Lenovo.
The deal needs clearance from the Committee on Foreign Investment in the United States (CFIUS), which protects U.S. national security.
Chinese companies faced the most scrutiny over their U.S. acquisitions in 2012, according to a CFIUS report issued in December.
Lenovo's purchase of IBM's notebook division faced scrutiny before approval, and this time will be easier, analysts said.
"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, a partner at law firm Davis Polk & Wardwell in Washington, D.C. who has handled CFIUS issues for 20 years.
Reynolds saw relatively little national security risk in the deal, noting that Lenovo was well-known in the United States.
Maybank Kim Eng analyst Warren Lau noted that the System X server, among the systems to be bought by Lenovo, is based on commoditized technology and components from the United States.
This deal is likely also to win U.S. antitrust approval, perhaps within weeks, said Jonathan Lewis, an antitrust partner with Baker & Hostetler LLP. "Given that Lenovo is likely to take advantage of its lower-cost manufacturing base in China, this deal is likely to be viewed as pro-competitive."
IBM shares edged 0.2 percent lower to $182.27 at mid-afternoon Thursday. Trading in Lenovo shares was halted before the close in Hong Kong ahead of the announcement.
SEVEN QUARTERS OF LOSSES
The deal with Lenovo marks another step in IBM's switch away from hardware to software and services. IBM said this month it would spend more than $1.2 billion to build up to 15 data centers on five continents to expand its cloud services and reach new clients and markets.
The company also said it would invest more than $1 billion to establish a new business unit for Watson - the supercomputer system that beat humans on the TV quiz show "Jeopardy" - to offer cloud services to businesses and consumers.
With Lenovo's PC business under siege from powerful smartphones and super-fast tablets, the company is remodeling itself as a force in mobile devices and data storage servers.
It would not be easy for Lenovo turn around the server unit, however. IBM's low-margin server business has posted seven quarters of losses as clients move to the cloud.
"To generate costs synergy, Lenovo will need to move most of the manufacturing from IBM's existing facility in Virginia to Asia while keeping some R&D in the U.S.," Lau said.
The server business being sold by IBM, which produced low-cost x86 servers, competes with Hewlett-Packard Co and Dell but lags both in market share.
IBM dominates the higher-end server market with a 57 percent share, according to research firm Canalys. IBM will retain its higher-margin server systems and continue to develop software and applications for the x86 platform.
Following closure of the deal, Lenovo will offer jobs to 7,500 IBM employees and assume customer service and maintenance operations.
"We will do a variety of things - improve products, drive improved costs, and couple it with the scale we have and our PC business to improve go-to-market," said Lenovo's Hortensius.
Analysts said Lenovo would likely find it easier than IBM to sell the x86 servers to Chinese companies as Beijing tries to localize its IT purchases in the wake of revelations about widespread U.S. electronic snooping.
BIGGEST TECH DEAL
Lenovo said it expected demand for computing power and recovery of global enterprise spending to further drive growth in the x86 server market.
Lenovo has agreed to pay $2.07 billion in cash and the rest with stock of the Hong Kong-listed PC maker.
The deal surpasses Baidu Inc's $1.85 billion acquisition of 91 Wireless from NetDragon Websoft Inc last year, according to Thomson Reuters data, and underscores the clout of China's technology firms as they expand overseas.
The unit posted a loss of $26.4 million after tax for the 12 months ended December 31, compared with a profit of $187 million in the 12 months ended March 2013. The x86 unit has annual revenue of $4.6 billion.
Talks between IBM and Lenovo fell apart last year due to differences over pricing, with media reports at the time suggesting IBM wanted as much as $6 billion for the unit.
Analysts said the sale may have been accelerated by IBM's problems in China following revelations of U.S. electronic spying and ongoing weakness in hardware sales.
The world's biggest technology services company posted a 23 percent drop in fourth-quarter revenue from China.
Lenovo's purchase of IBM's PC business in 2005 became the springboard for its leap to the top of global PC maker rankings, and the market is betting Lenovo will enjoy similar success with its latest acquisition, which is partly reflected in a 9.44 percent rise in its shares this year. The Hang Seng stock index is down 2.5 percent in the same period.
IBM's server business is the world's second-largest, with a 22.9 percent share of the $12.3 billion market in the third quarter of 2013, according to technology research firm Gartner.
Hewlett-Packard is the biggest player, while Lenovo does not appear in the top five.
Lenovo said it was advised by Credit Suisse and Goldman Sachs Group.