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In a deal that is a win-win for all concerned, Chinese PC maker, Lenovo Group Ltd. will purchase IBM’s low-end, commodity x 86 Server portfolios, related resources and operations for $2.3 billion, which includes $2.07 billion cash with the remainder in stocks.

The sale of the IBM x86 servers has been rumored for well over a year as Big Blue grappled with continuing pressure on its low-margin x86 servers. In its most recently completed fourth quarter, IBM’s revenue dropped 5.5% to $27.7 billion. Slumping hardware sales was the chief culprit for the revenue miss. IBM’s x86 server sales declined by 16% in the fourth fiscal quarter alone, following seven straight quarterly revenue declines.

Under the terms of the agreement, Lenovo will purchase:

  • IBM’s System x servers
  • The BladeCenter and Flex System blade servers and switches
  • The x86-based Flex integrated infrastructure systems
  • The NeXtScale and iDataPlex servers and associated software
  • IBM’s blade networking and maintenance operations

Additionally, Lenovo gets all of the aforementioned associated development, sales and marketing, finance, legal, integrated supply chain, operations, IT and manufacturing and Service and support (maintenance) operations. Also as part of the deal, Adalio Sanchez, General Manager, System x and Pure Systems in IBM Systems and Technology Group (STG) will move to Lenovo and assume the same role there. Approximately 7,500 IBM employees worldwide including those based at major locations such as Raleigh, North Carolina, Shanghai, Shenzhen and Taipei China will be offered employment at Lenovo. And since Lenovo’s U.S. headquarters in North Carolina is close by IBM’s Raleigh offices, it should be an easy transition for the majority of Big Blue workers.

Other Announcement Highlights

IBM is by no means abandoning its high-end server business. Among the other announcement highlights IBM will:

  • Retain its enterprise systems portfolio, including System z mainframes, Power Systems, Storage Systems, Power-based Flex servers as well as the PureApplication, PureData and SAP Hana appliances.
  • IBM and Lenovo will enter into broad-based strategic collaboration.
  • Lenovo will become IBM’s preferred supplier of x86 server technology.
  • Lenovo will license, OEM and resell IBM Storwize and tape storage technologies, the General Parallel File System, the SmartCloud Entry and elements of the x 86 system software portfolios, and the Platform Computing portfolio.
  • Integrated systems software components will move to Lenovo.
  • Higher-level management tools like System Director and Flex Systems Manager will remain with IBM and be licensed by Lenovo.
  • IBM and Lenovo will work together on patches to IBM software required by Lenovo.
  • Until the transaction is completed, the two companies will continue to operate independently.

The acquisition is expected to be completed later in 2014, pending regulatory approval. Once the transaction is complete, Lenovo will assume related customer service and maintenance operations. IBM will continue to provide maintenance delivery on Lenovo’s behalf for an extended period of time, so customers should see little or no or no change in their maintenance support.

Both the IBM and Lenovo executives enthusiastically applauded the deal with Steve Mills, IBM Senior Vice President and Group Executive of the Software & Systems Group, stating that the “The divestiture [of the x86 server line] allows IBM to focus on system and software innovations…such as cognitive computing, Big Data and cloud.”

Peter Hortensius, senior vice-president at Lenovo and president of its Think Business Group noted that the acquisition of IBM’s x86 server portfolio will enable Lenovo to increase its current two percent niche market in servers by sevenfold to 14%. To accomplish that goal and “generate costs synergy,” Lenovo will need to move most of the manufacturing from IBM’s existing facility in Virginia to Asia while keeping some R&D in the U.S.,” Hortensius said.

Analysis

To reiterate, Lenovo’s acquisition of IBM low-end, commodity x86 server portfolios is tactical and long term strategic win for all parties: IBM, Lenovo, their respective business partners, customers and the 7,500 IBMers who will make the move to Lenovo.

IBM and Lenovo have had a long, productive working relationship. In 2005 Lenovo bought IBM’s PC business including the popular ThinkPad desktops for $1.7 billion, by 2012, Lenovo had surpassed all rivals to become the world’s top PC market.

IBM is following the money and the market trends. IBM’s server business is the world’s second-largest, with a 22.9 percent share of the $12.3 billion market in the third quarter of 2013, according to technology research firm Gartner. In fact, IBM’s System z Enterprise mainframes and high end server market share and demand remain strong and solid. Overall IBM mainframes have in excess of 90% market share in that segment. IBM’s server business is the world’s second-largest. Big Blue currently has a 22.9% share of the $12.3 billion market as of the 2013 third quarter, according to statistics from Gartner Group.

The sale of the struggling x86 servers frees IBM to focus on what it does best: enterprise products and services, most notably, cloud computing and services and Big Data Analytics via its’ newly formed Watson Business Unit (BU) and its existing, soon-to-be-expanded Cloud Computing group. These are facts that IBM executives repeatedly emphasized during the conference call.

IBM is following the money & higher profit margins. No company has broader, deeper enterprise & services portfolio than Big Blue. And IBM’s sale of x86 Server business for $2.3B pays for its earlier investment of $1 billion in the new Watson BU headquartered in New York City earlier this month and the $1.2 billion it is investing in expanding its Cloud Computing portfolio in 40 global data centers in 15 countries on five continents.

Is the $2.3 billion sale much less than IBM’s rumored $6.5 billion asking price for the x-86 servers last summer? Probably. IBM’s decision to sell the x-86 commodity server portfolio and associated services and make a swift, clean exit. The alternative was to retain the x-86 server line and let it continue to bleed revenue and drain resources.

IBM is simultaneously shedding unprofitable products, while the sale of the x86 server lines effectively funds Big Blue’s expansion into leading edge and emerging market segments.

Selling the x86 line to Lenovo is an intuitive and obvious move that makes perfect business sense for IBM, Lenovo and their respective customers and business partners. Lenovo has a proven record, experience in high volume x-86 desktop hardware and a long history of working with IBM. Customers and business partners can be confident that Lenovo has a very high probability of succeeding with the x- 86 server businesses just as it has with IBM PCs.

Finally, there is the human element. The IBM/Lenovo x 86 agreement also positively impacts 7,500 Big Blue employees globally. They can transition to Lenovo which also has offices in Raleigh, NC, so few, if any, will have to move.  The IBM/Lenovo deal also opens the door wider for IBM to expand its existing footprint into China and the Pacific Rim.

Conclusions

In summary, IBM’s sale of its x-86 business to Lenovo is the best possible outcome for all concerned. Both companies must still execute once the transaction closes and gets the necessary regulatory approval. However based on past history, the likelihood of success is high. And IBM will be able to forge ahead unhindered in its quest for continued innovation in enterprise systems and the highly competitive cloud computing arena.

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