Lenovo may acquire IBM server unit

Company exploring new frontiers in enterprise-level products and services

Lenovo Group Ltd, the world's second-largest personal computer manufacturer, said on Friday it is in "preliminary negotiations" about an acquisition following reports that the Chinese company may purchase International Business Machines Corp's server unit to beef up its enterprise hardware sector.

The Beijing-based company is in talks with IBM to acquire the x86 server business, said information technology industry news website crn.com.

IBM is seeking $5 billion to $6 billion for its x86 server business, it said, citing an anonymous source familiar with the matter.

"As at the date of this announcement, no material terms concerning the potential acquisition have been agreed," Lenovo said in a statement to the Hong Kong Stock Exchange, where the company is listed.

Earlier this month, Chen Xudong, senior vice-president and general manager of Lenovo's China unit, told China Daily the company is considering mergers and acquisitions to strengthen its enterprise business. But he did not disclose any possible merger target.

Lenovo acquired IBM's PC unit in 2005 in a $1.25 billion stock and cash deal.

IBM declined to comment on the matter.

Fueled by the news, Lenovo stocks surged 9.46 percent in Hong Kong on Friday, and closed at HK$7.06 ($0.90).

Lenovo has been vigorously exploring the enterprise market as worldwide PC sales turn sluggish amid the global economic downturn.

International PC shipments are likely to witness a double-digit slump in the second quarter of this year as demand in China, which accounted for more than one-fifth of the market, shrank faster than expected, industry research company IDC warned.

Lenovo is slowly shifting its focus from PCs to mobile devices such as smartphones and tablets. In the meantime, it is also seeking new frontiers in enterprise-level products and services because of higher profit margins.

In 2012, Lenovo and US-based data-storage company EMC Corp formed a joint venture to develop server and storage equipment.

The joint venture will mainly target the Chinese market in coming years and then Western Europe and Russia in 2016, according to Chen.

The two companies released their first co-branded server and storage products on April 2.

Most of the products released were mid- and low-end entry-level products, but the companies pledged to develop more high-end servers as their research capabilities strengthen.

However, analysts expressed concern that the possible deal with IBM may harm Lenovo's ties with EMC as the Chinese company was relying on EMC's development resources to expand market share in China.

Acquiring IBM's server unit will increase Lenovo's R&D capabilities.

IDC said in March market demand for x86 servers saw a "notable uptick" in revenue during the fourth quarter of 2012.

IBM was the world's top server vendor in terms of revenue by the end of last year.

The company had a global market share of around 36 percent, followed by Hewlett-Packard Co and Dell.