NEW YORK, Jan 21 — China's Lenovo Group Ltd has resumed talks to buy International Business Machines Corp's (IBM) low-end server unit, a source familiar with the matter said, a purchase that would bolster its efforts to diversify beyond a shrinking PC market.

A deal for IBM's x86 servers, which power corporate data centres, fits in with Lenovo's attempts to remould itself as a growing force in mobile devices and data storage servers. It also helps IBM's shift away from hardware towards software and services.

The two companies failed to reach an agreement last year after differing on pricing. Media reports then put IBM's hopes at between US$4 billion to US$6 billion (RM13.2 billion to RM20 billion) for the unit, while Lenovo was said to be only willing to offer US$2.5 billion.

Analysts now estimate the sale of the IBM unit to Lenovo could be worth between US$2.5 billion and US$3 billion. That would make it the biggest ever deal in China's IT sector, outpacing Baidu Inc's acquisition of 91 Wireless from NetDragon Websoft Inc for US$1.85 billion last year.

“Everybody wins because even if IBM could double the profitability it's still not good enough for IBM. On the other hand, Lenovo doubling the server business margins is a good deal for Lenovo,” said Alberto Moel, a Hong Kong-based analyst at Sanford C. Bernstein.

Lenovo, the world's biggest PC maker, said today it was in preliminary talks about an acquisition. It declined to name the seller but said it was making the statement in response to reports about its potential acquisition of a server business.

It added that it had not entered into any definitive agreement and that no material terms had been agreed to.

An IBM spokesman said yesterday the company wouldn't comment on the matter.

Dell Inc, which went private in a US$25 billion deal last year, has also been cited in media reports as a potential suitor for the business. A Beijing-based spokesman for Dell declined to comment.

Eager seller, flush buyer

Lenovo's purchase of IBM's Thinkpad PC business in 2005 for US$1.75 billion became the springboard for its leap to the top of global PC maker rankings.

Moel, who estimates IBM's low-end server business could be worth between US$2.5 billion to US$2.9 billion, said IBM was likely more eager now to do a deal than last year after several quarters of weak earnings.

But any deal would also likely invite scrutiny from the Committee on Foreign Investment in the United States (CFIUS) as servers were more directly related to data security than PCs and phones, he added.

Lenovo could finance the deal through a combination of cash, debt and converts, said Nicolas Baratte, a Hong Kong-based analyst with brokerage CLSA. The company has US$3 billion in cash, and very little debt, and IBM is a very willing seller, he added.

“If IBM sells all its server business, except the top-end servers, the deal is worth US$2.5 to US$3 billion,” Baratte said.

“There is no financing problem for US$3 billion, but I don't think it will be one hundred per cent cash.”

Shares in Lenovo, which has a market value of US$13.7 billion, closed up 2.75 per cent at HK$10.46 (RM4.48) today, while the benchmark Hong Kong share index was up 0.5 per cent.

Its shares have surged 12 per cent this year, and earlier this month marked their highest level in more than 13 years after an IDC report showed it managed to boost PC shipments 9 per cent in the fourth quarter while industry shipments slid 5.6 per cent.

IBM is due to report fourth-quarter earnings later today. In the previous quarter, revenue missed expectations, hit by a 40 per cent drop in China hardware sales. — Reuters