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Lenovo-International Business Machines Corp. Deal Is 'Nothing To Get Excited About'

Lenovo-International Business Machines Corp. Deal Is 'Nothing To Get Excited About'

Lenovo (OTC: LNVGY) is about to close its acquisition of International Business Machines Corp.'s (NYSE: IBM) low-end server business.

The $2.1 billion deal is one of many that Lenovo has used to bolster its company. Previously, Lenovo purchased IBM's consumer PC business. Earlier this year the Chinese tech giant announced its plan to acquire Motorola Mobility from Google Inc.

"I wouldn't call it buying success," Global Equities Research analyst Trip Chowdhry told Benzinga. "I think this is a dumping ground. Did Lenovo buy any groundbreaking companies? No. They're just buying companies no one else wants."

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Chowdhry referred to Lenovo as a graveyard or museum of once-great companies.

"It's nothing to get excited about," he added.

Good For IBM

After acquiring the ThinkPad brand, Lenovo grew steadily and eventually became one of the world's largest PC manufacturers. Lenovo could enjoy similar success with IBM's x86 server unit, but Chowdhry is among the analysts who think the sale is best for IBM.

"This is IBM doing what they're doing, which is getting out of commodity businesses," Sean Udall, CIO of Quantum Trading Strategies and author of The TechStrat Report, told Benzinga. "[IBM is] trying to move up the food chain [and] the margin chain, which they've done with services and things like that. The company is working to get out of commodity businesses, whereas Lenovo is trying to increase their presence in commodity businesses because that's their specialty."

Patrick Moorhead, president and principal analyst at Moor Insights & Strategy, concurred with this assessment.

"IBM has been trying to flee from hardware," Moorhead told Benzinga. "They got out of PCs. They're getting out of x86 servers. Their hardware business is in a freefall. What they're favoring in terms of investments is higher-margin opportunities like services, consulting and software."

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Growth Potential

Moorhead said that for the first time, the IBM server group will finally be able to "take the handcuffs off and see what they really can do."

"They've been held back by IBM's business model versus Lenovo's business model that actually favors hardware," he said.

Udall said it is part of Lenovo's strategy to acquire companies others don't want, "which is what they're good at."

"They're basically enhancing their specialty," said Udall.

Future M&As

After dropping roughly $5 billion on two acquisitions, analysts doubt the company will jump into another merger.

"I think they're gonna let the dust settle and integrate these companies," said Moorhead. "They've already said that IBM coming in is going to be a financially lucrative situation right off the bat, but they are going to need about a year to get Motorola Mobility stabilized."

Moorhead expects Lenovo to make some acquisitions in enterprise hardware "further down the line."

In the meantime, Udall suspects Lenovo will only take action if the right offer comes along.

"I suppose if something got cheap enough -- if HTC got to fire sale-type levels," said Udall. "In my view, Lenovo bought Motorola for a very good price. I would say they're in pretty good shape. I don't know that they need to buy a whole lot more."

Disclosure: At the time of this writing, Louis Bedigian had no position in the equities mentioned in this report.


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