Lenovo became the world leader in personal computers after buying IBM's loss-making ThinkPad business in 2005

Lenovo buys IBM's low-end server business for $2.3bn

PC maker Lenovo has agreed to buy IBM’s low-end server business for $2.3bn (£1.4bn) in what is set to be China's biggest technology deal.

The acquisition comes nearly a decade after the Chinese firm bought IBM's loss-making ThinkPad business for $1.75bn, eventually becoming the world leader in personal computers in 2012.

The sale of the low-end server operation, which still needs US government approval, will allow International Business Machines (IBM) to focus on its decade-long shift to more profitable software and services.

Lenovo's acquisition would lift its market share in the server market to 14 per cent from 2 per cent, said Peter Hortensius, senior vice-president at Lenovo and president of its Think Business Group.

While IBM dominates the higher-end server market with a 57 per cent market-share, according to research firm Canalys the server business being sold to Lenovo, which produced low-cost x86 servers, competes with Hewlett-Packard and Dell but lags both in market share.

IBM will retain its higher-margin server systems and will continue to develop software and applications for the x86 platform. Following closure of the deal, Lenovo will offer jobs to 7,500 IBM employees around the world 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," Hortensius said.

Lenovo said it expected demand for computing power and recovery of global enterprise spending to further drive growth in the x86 server market. It has agreed to pay $2.07bn in cash and the rest with stock of the Hong Kong-listed PC maker.

The deal still needs clearance from the Committee on Foreign Investment in the United States (CFIUS), which is charged with protecting US national security. Chinese companies faced the most scrutiny over their US acquisitions in 2012, according to a CFIUS report issued in December, and Lenovo's purchase of IBM's notebook division faced similar scrutiny.

"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 practise at law firm Davis Polk & Wardwell in Washington, DC, and has 20 years of experience dealing with CFIUS.

Reynolds said there seemed to be relatively little national security risk in the deal, adding that Lenovo was now a fairly well-known corporate citizen compared with 2005.

Maybank Kim Eng analyst Warren Lau also noted that the System X server, among the systems bought by Lenovo, is based on commoditised technology and components that are sourced from the USA.

With Lenovo's PC business under siege from powerful smartphones and super-fast tablets, the company is diversifying its revenue and remodelling itself as a force in mobile devices and data storage servers.

But IBM's low-margin server business has posted seven quarters of losses as more clients switch to cloud storage from traditional infrastructure.

"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 US," Lau said.

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