Report: Lenovo, IBM x86 Server Sale Talks Hit Snag Over Price

Lenovo has yet to buy IBM‘s (NYSE: IBM) x86 server business. IBM and Lenovo, for the time being, walked away from discussions on a multi-million dollar transaction for the Chinese PC maker to buy segments of IBM’s x86 server business, according to a report in Fortune.

What’s holding the deal up when it seemed close to getting done? With the PC market in free-fall, is IBM’s x86 server business worth less every day? Is Lenovo questioning the future value of x86 servers?

Indeed, the snag appears to be over price, with IBM reportedly asking upwards of $6 billion for the business and Lenovo recoiling at that figure, which equates to twice IBM’s overall hardware revenue logged in Q1 2013. Bloomberg has valued the deal at between $2.5 billion to $4.5 billion while others have pegged it in the $5 billion to $6 billion range.

Wong Wai Ming, Lenovo CFO, reportedly in the U.S. this past week to finalize the deal, left empty-handed, according to Bloomberg, citing sources familiar with the discussions. Still, all doors haven’t closed just yet and the talks could resume at some point in the near term, the sources said.

Wild Cards

Two big unknowns are what impact IBM’s sliding x86 server revenue has had on the proposed transaction, and to what degree Lenovo believes it can take the business and run, duplicating what it did with IBM PCs when it bought that business eight years ago.

Less than two weeks ago, Lenovo essentially confirmed its play for IBM’s x86 server business, posting a statement on the Hong Kong exchange from Chairman and CEO Yang Yuanqing that it is in “preliminary negotiations with a third party in connection with a potential acquisition.” Lenovo said at that time “no material terms concerning the potential acquisition have been agreed and the company has not entered into any definitive agreement.”

At this point, that’s still the case, although the smart money is still on this deal getting done.  IBM doesn’t like falling-margin businesses. Lenovo is a master in that area, and is taking measures to branch out from its core PC-making businesses to tablets, smartphones, mobility and the cloud. This transaction will be hard to walk away from for both parties, unless a better buyer emerges. Apparently, Lenovo is the only fish IBM has on the line.