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Michael Kendall stood in the Lenovo booth on the chaotic show floor at the Intel Developer Forum in September 2013 talking about Lenovo’s small x86 server business.
Kendall, director of product marketing at Lenovo and a former longtime employee at Hewlett-Packard, spoke about two new low-cost tower servers the company was rolling out at the show while his hand rested on the a higher-end two-socket ThinkServer system that was a couple of months from launch.
He also spoke about the challenges facing Lenovo as it looked to grow its presence in a highly competitive and increasingly commoditized x86 server market, and ways the company could differentiate itself from the likes of HP, Dell and IBM.
“The challenge is how we address [the market] differently,” Kendall told eWEEK.
Four months later, the landscape has changed radically for Lenovo, its competitors and the market at large. The world’s largest PC maker has agreed to buy IBM’s x86 hardware business for $2.3 billion, a move that, once completed, will make Lenovo the world’s third largest server maker and an even more significant competitor to Dell and HP in the coveted Chinese market, where Lenovo is based.
It’s a deal that almost was made last year, and was the subject of intense speculation this month before being announced Jan. 23. It’s also one that most analysts say is a good move for both Lenovo and IBM, and one that will cause little, if any, disruption for customers.
“IBM’s sale of its x86 business to Lenovo is the best possible outcome for all concerned,” Laura DiDio, principal analyst at ITIC, wrote in a research note. “Both companies must still execute once the transaction closes and receives the necessary regulatory approval. However based on past history, the likelihood of success is high.”
Peter Hortensius, senior vice president at Lenovo and president of its Think Business Group, said during a conference call Jan. 23 that having a strong server business is part of the company’s PC-Plus strategy—essentially leading in every area of computing—so buying IBM’s x86 server business “is the logical next step for us.” The deal will immediately grow Lenovo’s presence in the server space from No. 6 to No. 3 and increase its server business tenfold, to almost $5 billion in revenue.
“What this deal does is accelerate our strategy by about five years,” Hortensius said. “For us, this was a fast way to do things that we were already planning to do.”
Through the acquisition, Lenovo not only will get IBM’s x86 servers, but also Big Blue’s BladeCenter and Flex System blade servers and switches, Flex integrated systems, NeXtScale and iDataPlex servers and software, Enterprise X-Architecture technologies, and blade networking and maintenance operations.
IBM will keep its mainframe and Power server businesses and will continue to develop its Windows and Linux software offerings for x86 systems and the developers who build the software. It will also keep its storage systems, Power-based Flex servers, and Pure-Application and PureData products. In addition, Lenovo will remain IBM’s primary provider of x86 systems and will be the company customers turn to for help, according to Tom Rosamilia, senior vice president for IBM’s Systems and Technology Group.
IBM Server Deal Gives Lenovo the Tools to Take On HP, Dell
Between that and IBM’s ongoing relationship with Lenovo—stemming from the Chinese company buying IBM’s PC business in 2005 for $1.25 billion—the impact on customers should be minimal, Rosamilia told eWEEK, noting that about 7,500 employees from the x86 server business will move to Lenovo.
“We expect a very smooth transition because a) we’ve done this before with these guys, and b) we’ll be providing the maintenance support for these customers,” he said. “When they call for help, they’ll deal with us.”
The deal is part of IBM’s continuous effort to shed low-margin, commoditized businesses—such as PCs, printers and disk storage—and focus more on growth areas, including data analytics, software and cloud computing, and businesses like Smarter Planet and its new Watson business unit.
“For IBM, the deal allows it to gracefully exit an increasingly commoditized market, repays significant investments in x86-based system development, extends and deepens its relationship with a long-trusted strategic partner and allows it to target its resources on long term goals and market opportunities,” Charles King, principal analyst with Pund-IT Research, said in a research note.
Selling the server business to Lenovo also strengthens IBM’s relationship with a key partner in the booming China market.
While there won’t be much change in the server market in North America and other mature markets, it’s in China where HP and Dell will feel much of the impact of a significantly stronger Lenovo, according to analyst Richard Fichera at Forrester Research.
“Life just got tougher [for competitors], especially in China and other emerging markets,” Fichera wrote in a post on the Forrester blog site. “Lenovo has an efficient supply chain and a deep channel organization with excellent SMB reach. This deal now gives them a world-class server product line that suddenly jumps them to a parity or superior position to Huawei in China, and gives them local supplier status versus Dell and HP along with a competitive product lineup.”
Dell probably stands to lose the most with a stronger Lenovo on the scene, he wrote. Lenovo not only comes with a strong reputation for dealing with small and midsize businesses both within North America and in other markets, but now it will have IBM’s portfolio of enterprise-level products.
“Current volume customers of HP and Dell should look forward to gaining another viable competitive option for future low-end server procurements,” Fichera wrote.
The deal is expected to close in six to nine months, and executives with both companies said they do not see any significant hurdles in the regulatory review process.