Lenovo to Buy IBM x86 Server Unit for $2.3 Billion

By Jeffrey Burt  |  Posted 2014-01-23

Lenovo to Buy IBM x86 Server Unit for $2.3 Billion

Lenovo, which during the past nine years has leveraged its acquisition of IBM's PC business to become the world's top vendor in that market, is now buying Big Blue's low-end x86 server unit for $2.3 billion.

The two companies made the announcement Jan. 23, about eight months after talks on the server business broke off between IBM and Lenovo, reportedly over a disagreement about the valuation of IBM's division.

In this deal, Lenovo will get IBM's System x systems, as well as its 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. Meanwhile, IBM will continue to build out its Windows and Linux software offerings for the x86 server platform, and for a while will provide maintenance delivery on the systems. Lenovo will take over customer services and maintenance operations, the companies said.

About 7,500 IBM employees worldwide—including at such sites as Raleigh, N.C.; Shanghai and Shenzhen in China; and Taipei, Taiwan—will be offered employment by Lenovo. 

Negotiations between the two companies were first reported last year, though the discussions ended in May 2013. Reports began circulating this month that Lenovo and IBM were again talking about a deal and that other vendors—in particular, Dell and Fujitsu—also were interested. Ultimately, Lenovo won out.

The deal comes as IBM officials continue to look to shed low-margin hardware businesses, opting instead to focus on such areas as cloud computing, analytics and software. IBM also is investing heavily in such businesses as its Smarter Planet. The company recently announced it will spend more than $1 billion on a new business group created around its Watson technology, and $1.2 billion to grow its cloud computing capabilities in 40 data centers around the world.

Over the past several years, IBM has exited such hardware spaces as PCs and printers, and the x86 server business falls into the commoditized category that officials have opted to ditch. The deal still leaves IBM with its System z mainframe unit, Power systems, storage offerings and PureApplication and PureData appliances.

"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," Steve Mills, senior vice president and group executive for IBM Software and Systems, said in a statement.


Lenovo to Buy IBM x86 Server Unit for $2.3 Billion

IBM also gets to rid itself of a business that increasingly was becoming a drag on its financial numbers. The company reported Jan. 21 that the hardware unit's profit fell $750 million in the fourth quarter and $1.7 billion for all of 2013. During a conference call, Martin Schroeter, chief financial officer and senior vice president for finance and enterprise transformation at IBM, said the company was "dealing with some challenges in our hardware business model specific to Power, storage and X86."

For Lenovo, gaining IBM's server business gives it a significantly greater presence in the data center, and enables it to diversify its portfolio and lessen its reliance on the declining global PC market. The company has been selling servers in China for almost two decades, but in recent years has looked to expand its server market into other regions, including North America. The company two years ago created the Enterprise Systems Group to help it gain traction in the North American market.

The two companies also will expand their relationship to include an OEM and reseller agreement for sales of other IBM technologies, including its Storwize disk storage systems, tape storage products, SmartCloud Entry offering and parts of its system software solutions.

"This acquisition demonstrates our willingness to invest in businesses that can help fuel profitable growth and extend our PC Plus strategy," Lenovo Chairman and CEO Yang Yuanqing said 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."

Jack Gold, principal analyst with J. Gold Associates, said both companies will benefit from this deal.

"This is win-win as IBM gets to unload the overhead associated with having a manufacturing line, and Lenovo gets the IBM channel to sell through," Gold wrote in a report. "And Lenovo also gets the IBM service organization engaged in making the servers successful in the enterprise. Lenovo also has its eye on its currently biggest competitor—HP (with Dell not far behind), and this acquisition gives them a greater breadth of products (and an IBM endorsement) with which to compete."


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