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IBM Server Business Sale to Lenovo Ok'd by China

Zacks Equity Research

IBM Corp’s (IBM) sale of its low end server business to China-based technology company, Lenovo Group for $2.3 billion recently received regulatory approval from China’s anti-monopoly branch.

This approval from the Chinese Government is a positive for both Lenovo as well as IBM. IBM is a U.S.-based firm and per Chinese law, a China-based entity aiming to expand into Western markets has to obtain approval from the government for the same.

However, there seems to be no respite for Lenovo as it still awaits the approval from the Committee on Foreign Investment in the United States (:CFIUS) regarding the same. CIFIUS is an agency solely responsible for reviewing all cross-border merger & acquisitions (M&A) with an intention to protect the security of the nation.

Of late, the relation between the two nations has soured on account of cybersecurity issues with each blaming the other for cyber spying. Per sources, this was largely responsible for the delay in obtaining approval.

Lenovo is also considering the idea of purchasing Google’s (GOOGL) Motorola Mobility unit for $2.9 billion. Per Lenovo’s Chief Executive, Yang Yuanqing, the company intends to complete both the acquisitions by the end of 2014.

With the acquisition of IBM’s server business unit, Lenovo expects to expand its market share, which will boost top-line in the long run.

On the other hand, the sale of the low-margin x86 server business will increase IBM’s profitability. The deal will help the company to focus more on its fast growing software and services business. We also believe that the divestiture reduces significant competition for IBM.

Although IBM’s first quarter results were disappointing, we believe that strategic acquisitions, divestiture of non-core businesses, investments in fast growing markets such as cloud computing and analytics business will boost the top line in 2014.

Moreover, aggressive share buyback will also boost profitability. However, sluggish enterprise IT spending and intensifying competition from the likes of Oracle (ORCL) and SAP AG (SAP) in the software business are headwinds in the near term.

Currently, IBM has a Zacks Rank #4 (Sell).

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