Lenovo buying IBM’s x86 server business for US$2.3 billion

Lenovo bought IBM’s PC business in 2005 and it’s now stepping in to pick up another market Big Blue is exiting, with a $2.3 billion deal announced Thursday to acquire IBM’s x86 server business.

The definitive agreement will see Lenovo pick up System x, BladeCenter and Flex System blade servers and switches, x86-based Flex integrated systems, NeXtScale and iDataPlex servers and associated software, blade networking and maintenance operations for $2 billion in cash and $300,000 in Lenovo stock.

“This acquisition demonstrates our willingness to invest in businesses that can help fuel profitable growth and extend our PC Plus strategy,” said Yang Yuanqing, chairman and CEO of Lenovo, in a statement. “With the right strategy, great execution, continued innovation and a clear commitment to the x86 industry, we are confident that we can grow this business successfully for the long-term, just as we have done with our worldwide PC business.”

IBM will still be a hardware player; it will retain its System z mainframes, Power Systems, Storage Systems, Power-based Flex servers, and PureApplication and PureData appliances. And IBM said it will still develop its Windows and Linux software portfolio for the x86 platform. About 7,500 IBM employees are expected to be offered employment by Lenovo.

“This divestiture allows IBM to focus on system and software innovations that bring new kinds of value to strategic areas of our business, such as cognitive computing, big data and cloud,” said Steve Mills, senior vice-president and group executive, IBM Software and Systems, in a statement. “IBM has a proven record of innovation and transformation, which has enabled us to create solutions that are highly valued by our clients.”

James Alexander, senior vice-president with the Info-Tech Research Group, said Lenovo is a good partner for IBM. IBM already has a stake in the Chinese vendor, which will increase through this deal, and Lenovo will be better able to take the x86 business into the lucrative Chinese market. Lenovo will also be able to squeeze more margin out of a highly commoditized space.

“Lenovo, because of how and where they operate with a much lower cost per employee, will be able to operate it much more efficiently from a distribution and manufacturing perspective,” said Alexander. “For them, if they can survive in the cut-throat world of endpoint devices, servers probably represent an uptick in terms of the margin they’re able to generate.”

For channel partners, Alexander doesn’t think the acquisition will mean much in the way of change – it’s just a different partner to work with. IBM has been focusing on partners selling higher value and higher margin products and services; the deal will allow IBM to focus even more on those more strategic partners, while the server partners work with a new vendor more focused on growing that business.
“Lenovo has demonstrated they can do a decent job and commitment in supporting partners in the pack and ship business,” said Alexander.

Analyst David Senf, vice-president of IDC Canada‘s infrastructure solutions group, notes that Lenovo is picking up a well-maintained division. In Canada IBM has a 19 per cent share of the x86 server market, compared to nine per cent in the U.S.

Lenovo already sells x86 servers, he noted, of the one socket and low-end two socket variety with an average price of $1,800. By comparison the IBM’s x86 servers it’s picking up have an average selling price of $8,000. HP is the number one x86 server vendor by revenue in Canada with 36 per cent of sales, followed by Dell with 26 per cent, IBM, Cisco with eight per cent, Oracle with five per cent and Lenovo with one per cent.

The deal could be good news for Cisco Systems Inc., Hewlett-Packard Co and Dell, says Wayne Pauley, a senior analyst at the Enterprise Strategy Group. The three will likely be calling IBM accounts looking for customers willing to switch to their servers.

On the other hand, he added, the deal raises the question of whether x86 servers are truly commodity products. Dell and HP have been struggling financially in the past two years — HP has seen revenue drop, Dell took it self private — so arguably the industry is getting close to that point.

IBM presumably thinks so: Pauley noted that IBM’s timing to get out of the PC market seven years ago was “impeccable.”

The transaction is subject to regulatory requirements and closing conditions.

— With files from Howard Solomon

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Jeff Jedras
Jeff Jedras
A veteran technology and business journalist, Jeff Jedras began his career in technology journalism in the late 1990s, covering the booming (and later busting) Ottawa technology sector for Silicon Valley North and the Ottawa Business Journal, as well as everything from municipal politics to real estate. He later covered the technology scene in Vancouver before joining IT World Canada in Toronto in 2005, covering enterprise IT for ComputerWorld Canada. He would go on to cover the channel as an assistant editor with CDN. His writing has appeared in the Vancouver Sun, the Ottawa Citizen and a wide range of industry trade publications.

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