By Paul Mozur
BEIJING--Lenovo Group Ltd.'s (0922.HK) talks with International
Business Machines Corp. (IBM) to buy part of the U.S. company's
server business have broken down due to differences over price, a
person familiar with the matter said Thursday.
Despite weeks of negotiations, there remains a "huge gap" in
terms of the valuation of IBM's x86 server unit, according to the
person. Lenovo values the server unit below $2.5 billion, said the
person.
"There was no agreement on valuation," said the person. "In
terms of sitting around the table and working through the nuts and
bolts of the transaction, that's not happening right now."
IBM doesn't break out server revenue, but Morgan Stanley
estimates the x86 server business generated about $4.9 billion of
the company's $15.4 billion in server sales last year.
Last month, Lenovo said it is in talks with an unnamed third
party for a potential acquisition but it didn't disclose further
details.
Some analysts said that the cessation of talks could be part of
negotiation tactics by both sides, and a deal could still make
sense and happen in the coming months.
IBM has struggled to compete in selling x86 servers against
rivals Dell Inc. (DELL) and Hewlett-Packard Co. (HPQ) in a market
that has seen margins fall as volume has increased. IBM has a
history of aggressively shifting its business mix to areas with
better growth and higher profit margins.
For Lenovo, an acquisition would give it a significant portion
of the low-end server market and enable it to better compete with
H-P and Dell, rivals which it has outmaneuvered in the
personal-computer market in recent years.
Analysts said Lenovo could use its strong channels and
connections in China to sell servers into a market where the
hardware is still in high demand. The purchase would also help
Lenovo secure a new source of growth and profit as world-wide PC
sales are plummeting and the company's fledgling smartphone
business hasn't yet taken off outside China.
In 2012, IBM was the No. 3 player in the low-end server market
after H-P and Dell, according to technology research firm
Gartner.
Any foreign investment by a Chinese company in a U.S. company
tied to critical technology or national security could be looked at
by U.S. regulators. Lenovo's 2005 acquisition of IBM's PC unit came
under scrutiny by the U.S. Congress and the U.S. Committee on
Foreign Investment before the deal was approved.
The political environment is more pitched this time around. U.S.
concerns over cyberattacks originating in China have become a
sticking point between the countries. A U.S. congressional report
last year concluded that Chinese telecommunications-equipment
makers Huawei Technologies Co. and ZTE Corp. posed a
national-security threat, saying their equipment could be used by
Beijing to spy on Americans. The companies denied the
allegations.
-Write to Paul Mozur at paul.mozur@dowjones.com
Spencer Ante in New York contributed to this article
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