Serves them well

Ed Snowden helps Lenovo justify $2.3-bn IBM deal

Lenovo has Edward Snowden to thank for its latest acquisition. The Chinese personal computer maker has struck a $2.3-billion cash-and-stock deal to buy IBM's low-end server business. Talks last year foundered over price. But security concerns raised by the whistleblower's revelations have hurt Big Blue's sales in the otherwise expanding Chinese market. Lenovo's ownership could help it win back customers.

The last 12 months have been tough on IBM's hardware business. Its low-end servers, the basic workhorses of corporate data centres, are feeling the pinch as companies increasingly move their data to the cloud. Credit Suisse analysts estimate the loss-making unit's revenue will fall to $4.1 billion this year from $4.7 billion in 2012.

China has been a particular weak spot. Though IBM does not say how much it makes in the People's Republic, it admits revenue fell more than 20 per cent year-on-year in each of the last two quarters. The official explanation is uncertainty surrounding China's economic reform plan. But poor results from other US tech companies in China suggest security concerns are also a factor. Snowden's disclosure of the close links between US technology groups and espionage agencies has made buyers wary.

Lenovo, which saw a potential bid for BlackBerry nixed by security worries, could benefit from such fears. About a fifth of all low-end servers shipped in 2014 will go to China, amounting to $5.5 billion in sales, according to Gartner. Chinese server revenue will grow 10 per cent in 2014, more than three times faster than the rest of the world. Lenovo can also control costs by bringing manufacturing of servers in-house. That was one of the factors that helped it revive IBM's PC business, which it bought in 2005. Economies of scale from buying components used in both servers and PCs are another potential benefit.

If it succeeds in reviving growth and restoring profitability, Lenovo should be able to justify paying what looks like a knock-down price. Progress is not assured: the Committee on Foreign Investment in the US must still give its approval. But if Lenovo gets the green light, this is one transaction where being Chinese might actually be an advantage.