Lenovo raises funds, IBM servers in sight?
Lenovo's upcoming debt offer is likely to raise US$1 to $2 billion, and will be used to help finance its desired purchase of IBM's low-end server business
Interestingly, the list of investment banks includes two from Japan, indicating the company will aggressively look for buyers in that market. Lenovo says the debt will be used partly to finance its aggressive global M&A campaign of the past two years, which has included purchases in Japan, Germany and Brazil. While no amount is given, the number of banks participating indicates the figure could be quite large, most likely over US$1 billion and perhaps even larger than US$2 billion.
All of this points back to Lenovo's strong desire to purchase the IBM's low-end server business, as the Chinese tech giant looks to diversify beyond its core PC business. Lenovo chief Yang Yuanqing has made it clear numerous times this year that traditional PCs are no longer his company's main focus, as he repeatedly stresses that his biggest rivals are smartphone and tablet PC leaders Apple (Nasdaq: AAPL) and Samsung (Seoul: 005930). Servers could be another important growth area, as such computers are one of the main components for web hosting and cloud computing.
Despite the breakdown, I predicted that talks would quickly resume after each company had time to re-think its position, as both really want this deal to happen. This announcement of this major new debt offering seems to be Lenovo's latest signal to indicate it hasn't given up its aim of reviving the deal, and that talks have already either restarted or that it intends to make a new offer in the near future.
I've been a critic of many of Lenovo's global acquisitions in the past, many of which are struggling companies in unfamiliar markets, making its chances of success difficult. But in this case, I really do think the IBM deal looks like a good fit for a number of reasons. Lenovo is already quite familiar with the US from its previous IBM purchase, and its US headquarters are in the same geographic area as the IBM server unit. The low-end server business would also complement Lenovo's existing product lines and offer better growth prospects than its fading core PC business.
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.
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.
To read more commentaries from Doug Young, visit youngchinabiz.com