Lenovo-IBM deal update: Lenovo Group Ltd. (OTCMKTS ADR: LNVGY) is set to complete its $2.1 billion acquisition of International Business Machines Corp. (NYSE: IBM) x86 server unit on Wednesday.
The move puts China's biggest personal computer maker in line to majorly expand its offerings in Asian markets - a major buy sign for Lenovo stock.
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.
Lenovo stock shot up 3.5% the day the deal was announced in January. IBM stock ticked up 0.4%, and for good cause...
There are two reasons why the Lenovo-IBM deal is such an exciting 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."
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 stockholders...
No. 2: Lenovo (LNVGY) stock was already surging.
Lenovo stock has climbed more than 23.3% this year and 36.59% in the last six months.
Its earnings report released ahead of the January deal supported this price rise with healthy revenue and net income gains. Lenovo's 2013/14 Q2 results revealed 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 No. 2 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
LNVGY stock traded at $29.70 a share on Monday, ahead of the Oct. 1 Lenovo-IBM deal close.
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