$2.3 Billion Lenovo-IBM Deal Means One Thing for Investors: Buy Now

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On Jan. 23, Lenovo Group Limited (OTCMKTS: LNVGY) announced a $2.3 billion deal with International Business Machines Corp. (NYSE: IBM) - and that deal is a buy sign for Lenovo stock.

Lenovo Gr Adr
NASDAQ: LNVGY
Sep 22
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Price: 30.61 | Ch: -0.49 (-1.6%)

Personal tech company Lenovo will buy IBM's x86 low-end servers, one of the world's largest computer service businesses geared toward less complex data analytics. About 7,500 IBM employees will also move to Lenovo as part of the deal to help support the new inventory and implementation.

Following news of the deal, Lenovo stock went up 3.5% Thursday morning, while IBM shares ticked up 0.4%, and for good cause.

There are two reasons why the Lenovo-IBM deal is such a big deal for investors:

No. 1: The Lenovo-IBM deal makes both companies stronger.

Lenovo's move is a perfect example of forward-thinking deal-making.

First, Lenovo won't have a lot of catching up to do in terms of integrating IBM into its established business.

"Lenovo already purchased the PC business from IBM in 2005. That means they've done their due diligence and know IBM as a company and its equipment," Money Morning Defense & Tech Specialist Michael A. Robinson said. "This is a long-term relationship, and Lenovo recognizes that."

Second, low-end servers are cheaper than other types of servers. Even though the low-end server business does not offer the biggest and best date rates and storage, in terms of servers, it does open new doors for Lenovo.

"The deal lets Lenovo compete on price - to sell low-end to developing markets, and try to increase their server business," Robinson explained. "And Lenovo has a home court advantage when it comes to having a foothold in softer, developing markets."

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IBM's low-end servers make Lenovo a more fully integrated computer company and allow it a more robust product offering.

And it's not just a good deal for Lenovo.

"Lenovo is enhancing and deepening its relationship with IBM, and IBM is standing behind its product and the people they put into the mix," Robinson said. "It's a win for both parties."

But - as the following numbers show - the biggest winners could be Lenovo stock holders...

No. 2: Lenovo (LNVGY) stock was already surging.

Lenovo stock has climbed 7.98% this year and 45.02% in the last six months.

Its latest earnings report supported this price rise with healthy revenue and net income gains.

Lenovo released its 2013/14 Q2 results on Nov. 7. It reported the following record-breaking numbers for its personal computer (PC) business:

  • Record-high revenue of $9.8 billion, up 13% year over year
  • Record-high net income of $220 million, up 36% year over year
  • Record-high PC market share of 17.7%, up 2.1 points year over year, and maintaining its position as the world's top PC company

Lenovo is the No. 1 ranked PC seller in China, Japan, Brazil, Germany, and Russia, and No. 2 in India.

In its "PC+" business divisions - smartphones, tablets, and other evolved PC tech - the numbers also looked most impressive:

  • Lenovo is number two in terms of smartphone volume in China, with volume growth of 78% year to year
  • Smartphone volume ranks fourth worldwide
  • And tablet sales worldwide grew 421% year to year to a volume of 2.3 million

Lenovo stock is trading around $25. Wall Street analysts give it a one-year target of $29.12, about 15% higher than its price today.

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