Word on Hong Kong’s version of Wall Street is that Lenovo Chairman and CEO Yang Yuanqing is – again – going after IBM”s server business.
“Bottom line: Lenovo’s upcoming debt offer is likely to raise $1-$2 billion, and will be used to help finance its desired purchase of IBM’s low-end server business,” declared the South China Morning Post today.
The world’s No. 2 PC maker, which operates its executive headquarters in Morrisville, is meeting with investors this week to raise capital through the sale of bonds. As we reported Friday, the bond drive will take place in Hong Kong (starting today), Singapore and London.
RBC analyst Amit Daryanani on Friday added more fuel to the speculation fire.
“We estimate IBM generated $5.2B in revenues from System X (x86 servers) in 2012 and had ~12% share, making it the 3rd largest vendor globally,” Daryanai wrote. “We note IBM has been losing share in this segment for several years. We estimate x86 servers generate ~20% gross-margins and mid-single digit operating margins, implying such a sale could boost gross and operating margins by 80-150bps for IBM.”
To Daryanani, a sale makes sense for IBM.
“As the x86 server business has been commoditized we believe the sale of the x86 server line by IBM is in line with its historical practice of exiting businesses that aren’t differentiated,” he said in a report quoted by Forbes. “Furthermore, this would help boost margins for IBM and specifically within the systems and technology group. There is a possibility that IBM may retain parts of the x86 server business that it views as strategic (Blade) that are used within their integrated PureSystems solutions that tend to generate higher margins. Finally, the gain from such a sale could be used to more then offset the $1.0B+ of restructuring costs IBM expects to have in 2013.”
Talks between IBM and Lenovo about a server deal broke down recently, but the South China Post expects talks to resume.
The bond sale is “the latest signal that it still hopes to revive stalled talks to buy IBM’s low-end server business,” the newspaper said. “More broadly speaking, this announcement also marks a new chapter in Lenovo’s development as it adds bonds to its arsenal of to tools for financing global M&A. In the past, Lenovo typically gave stock to finance a big part of its global M&A, which was the case with its landmark purchase of IBM’s PC business in 2005 and its more recent formation of a joint venture with Japan’s NEC.”
Expect a deal soon, the Post adds.
“At the end of the day, I would expect to see these two companies return to the bargaining table and strike an initial deal perhaps by the end of this month, settling on a price in the US$4 to $6 billion range. When they agree on a price, this upcoming debt offering will become, a key part of the financing plan, as Lenovo makes its biggest-ever acquisition as part of its ongoing transformation.”
Lenovo does have cash available already at some $3.5 billion, according to its most recent financial statement.
However, the bond sale may not be easy, Bloomberg warns.
“Borrowing costs will definitely be higher and I think new issuance will not be an easy sell in this market,” Brayan Lai, a Singapore-based analyst in emerging-market credit trading at Jefferies Group LLC, told Bloomberg. “Sentiment is very wary at the moment and markets will be closely observing data releases and economic actions over the next couple of months.”
[LENOVO ARCHIVE: Check out eight years of Lenovo stories as reported in WRAL Tech Wire.]
