In the second major deal between Lenovo and IBM (NYSE: IBM), the world’s No. 1 PC manufacturer is buying Big Blue’s low-end server business for $2.3 billion. Lenovo, which bought IBM’s personal computer business in 2005, operates its global executive headquarters in Morrisville.

The deal involves some 2,000 IBM employees in the Research Triangle area. IBM employs an estimated 9,500 workers across North Carolina. The vast majority of those are based in RTP, which is one of the company’s larger campuses. 

Corporate executives said in a conference call that the deal would double Lenovo’s presence in the Triangle. Lenovo currently has some 2,000 employees at its Morrisville campus.

Specific numbers and where the workers will be based remain to be resolved, the executives said.

The executive management team of the server group involved is based in RTP, and senior executives said they would be joining IBM as well.

Adalio Sanchez. general manager of IBM System X business group, said he and senior management would be joining Lenovo. The group, which is at the core of the acquisition, has its headquarters in RTP. “A good chunk of it is here,” he said of management.”

However, Sanchez said his “management team” is spread across various locations around the world.

Sanchez also said he did not have “specific numbers” regarding the number of affected employees. They will be based “at facilities that make the most sense,” he told reporters in a conference call.

Peter Hortensius, senior vice president at Lenovo who runs the Think business hardware group, pointed out that the deal “would double our presence” in North Carolina.

In the 2005 sale, some 1,800 Triangle area workers moved to Lenovo from IBM.

Overall, some 7,500 IBM employees are affected by the sale and are expected to be offered jobs by Lenovo, according to IBM in its press announcement.

Some of the server operations are located in Raleigh as well as several cities in China and Taiwan.

However, the deal is contingent upon government review, just as in the 2005 deal.

“This acquisition demonstrates our willingness to invest in businesses that can help fuel profitable growth and extend our PC Plus strategy,” said Yang Yuanqing, chairman and CEO of Lenovo. “With the right strategy, great execution, continued innovation and a clear commitment to the x86 industry, we are confident that we can grow this business successfully for the long-term, just as we have done with our worldwide PC business.”

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Regulatory Review

The companies will submit information soon on the bid to the Committee on Foreign Investment in the United States, Chris Padilla, IBM’s vice president for governmental programs, said today in an interview. The inter-agency committee is led by the Treasury Department and reviews foreign-company purchases of U.S. assets for national-security concerns.

“It’s not like this is some unique, choke-point technology being sold to a Chinese firm,” Padilla said by telephone. “We’re quite confident of a positive outcome.”

Rumors about a deal had circulated a year ago, but the companies were unable to agree upon terms.

IBM has been looking to exit the server business due to declining revenues. Earlier this week, IBM reported a seventh consecutive drop in quarterly sales.

“This divestiture allows IBM to focus on system and software innovations that bring new kinds of value to strategic areas of our business, such as cognitive computing, Big Data and cloud,” said Steve Mills, Senior Vice President and Group Executive for IBM Software and Systems. “IBM has a proven record of innovation and transformation, which has enabled us to create solutions that are highly valued by our clients.”

Lenovo, meanwhile, turned the 2005 IBM deal into the world’s top PC manufacturer over the ensuing eight years. The company employs more than 2,000 people in the Triangle and operates a manufacturing plant in the Triad.

“PC Plus Strategy”

Lenovo is seeking to expand its business beyond reliance on PCs as global personal computer sales decline with consumers and businesses buying more smartphones and tablets. Lenovo recently expanded into the server business and has a joint venture with EMC, which also has a large presence in the Triangle, that designs and sells servers.

The diversification into other products is part of Yuanqing’s “PC Plus” strategy.

Lenovo is now a global leader in sales of smartphones as well as tablets.

Yang built Lenovo into the world’s largest maker of personal computers starting with the 2005 purchase of IBM’s PC unit for $1.25 billion, excluding debt. That transaction, the company’s previous largest, vaulted Lenovo from the No. 8 maker at the time to third. The company subsequently bought control of Germany’s Medion AG and NEC Corp.’s PC division in Japan.

The deal price includes about $2 billion of cash and the rest in Lenovo stock, the companies said in a statement today. The purchase adds IBM’s business using x86 processors as well as System x, BladeCenter and Flex System blade servers and switches that run corporate computer networks.

Yuanqing has weathered the global PC industry slump and maintained growth by expanding his ThinkPad notebooks into markets across Europe and South America, while adding mobile devices. Now he’s pushing into a business with wider profit margins than PCs, and adding about $4.6 billion of annual revenue, by offering storage equipment and servers via Lenovo’s largest acquisition yet.

“This deal is relatively transformational for Lenovo,” said Alberto Moel, an analyst at Sanford C. Bernstein & Co. In Hong Kong. “If Lenovo can control expenses and enjoy some of the higher gross margins in this business, which are above Lenovo’s PC margins, then this could be a very good deal for them.”

Some 1,800 IBM employees became part of Lenovo following the PC sale.

Lenovo later construc ted a new corporate campus in Morrisville, which now includes three buildings.

Market Boost

Lenovo will have about 14 percent of the market when the deal is completed, from less than 2 percent now, Senior Vice President Peter Hortensius said in a phone interview today.

The business Lenovo is buying makes IBM’s x86 servers, which are named for a chip design used by Intel Corp. and Advanced Micro Devices Inc. Servers have become a commodity amid increasing competition with companies such as Hewlett-Packard Co.

Yang built Lenovo into the world’s largest maker of personal computers starting with the 2005 purchase of IBM’s PC unit for $1.25 billion, excluding debt. That transaction, the company’s previous largest, vaulted Lenovo from the No. 8 maker at the time to third. The company subsequently bought control of Germany’s Medion AG and NEC Corp.’s PC division in Japan.

Mobiles, Enterprise

Yang said he wants to build future growth on mobiles and enterprise, supplying equipment and services to corporate and government customers.

“For the past 20 years, PCs were our core business,” the 49-year-old said in a phone interview. “This deal will meet our strategy and give us a good foundation for the enterprise business. We hope we quickly can build it into $10 billion in annual sales, from $4.6 billion now.”

Lenovo and IBM last year held talks on the server business that broke down when they couldn’t agree on a price. Talks resumed in November, Chief Financial Officer Wong Wai Ming said in a phone interview.

Shares of Lenovo were halted from trade in Hong Kong today. The stock has returned 34 percent to investors, including dividends, in the past 12 months.

“Due to the strong IBM client base, Lenovo can enter the top-tier enterprise services market,” Tony Yang, a Hong Kong- based analyst at BOCI Research Ltd. in Hong Kong said in an e- mailed report. “We think the service business will be Lenovo’s major driver in the future.”

Dell, HP

Lenovo had net cash of $2.46 billion as of Sept. 30, the company reported in November. CFO Wong in October said the company could also finance a large purchase by issuing equity.

IBM was the third-largest vendor of x86 servers in the third quarter, trailing Hewlett-Packard and Dell Inc., according to data from researcher IDC. IBM’s $1.21 billion in such hardware revenue during the third quarter accounted for 13 percent of the total $9.52 billion in global sales during the period, according to IDC. Lenovo didn’t rank among the top 10.

Yang is looking for growth from servers as global PC shipments fell 10 percent in 2013, the worst decline, researcher Gartner Inc. said this month.

The previous acquisitions helped Lenovo overtake Hewlett- Packard for the top spot in PC shipments in the second quarter of last year. Lenovo kept that spot with 18.1 percent market share in the fourth quarter, helped by a 6.6 percent increase in shipments, according to Gartner.

IBM’s Focus

The sale would continue IBM’s campaign to get rid of businesses with lower profit margins, such as hardware, to focus instead on software and services. Since selling the PC division to Lenovo, IBM has also divested units such as printers and retail-store systems.

IBM on Jan. 21 said the server business was dragging down sales and earnings as the company’s revenue declined for a seventh straight quarter amid plunging demand for the x86 servers.

The slump weighed on the hardware unit, where profit slid $750 million in the fourth quarter from a year earlier, it said.

IBM will keep its System z mainframes, Power Systems, Storage Systems, Power-based Flex servers, and PureApplication and PureData appliances, it said.

The proposed transaction may trigger a U.S. security review that could slow or even scuttle the purchase as growing Chinese investment in the U.S. has prompted national-security concerns.

Security Review

Proposed transactions by Chinese companies accounted for about 20 percent of reviews in 2012 by the Committee on Foreign Investment in the U.S, supplanting the U.K. as the most- scrutinized nation. The panel consists of the heads of federal agencies including the departments of Commerce, Defense, Homeland Security, Justice, State and the Office of the U.S. Trade Representative.

Lenovo’s Hortensius said the company wouldn’t have done the deal if they didn’t think it would pass U.S. regulators, he said.

Even if the deal can clear regulatory hurdles, Lenovo could still lose some of IBM’s traditional customers in the U.S., though that could be offset by gains in its home market of China, said Stephen Yang, a Hong Kong-based analyst at Sun Hung Kai Financial.

“Lenovo may still face some headwinds selling servers to American institutions and corporates due to worries over counter-intelligence,” Sun Hung Kai’s Yang said before the announcement. “Lenovo would likely focus on growing its China market first, like they’ve always done with any business.”