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Lenovo on Oct. 1 will become the world’s third-largest server vendor, and will begin efforts to overtake Hewlett-Packard and Dell for the top spot, according to officials.
Lenovo and IBM executives on Sept. 29 announced that, in two days, they will close the $2.1 billion deal in which Lenovo will buy IBM’s x86 server business. The acquisition that was announced in January is part of Lenovo’s larger push to become a dominant player in all segments of computing, an effort that includes the vendor’s current bid to buy Motorola Mobility from Google for $2.9 billion.
With IBM’s server business in the fold, Lenovo executives said the company will look to rapidly grow its Enterprise Business Group over the next year into a profitable unit with more than $5 billion in revenue, Lenovo Chairman and CEO Yang Yuanqing said during a conference call with analysts and journalists Sept. 29.
Yang and other executives also said that with the deal closing, they can aggressively push back at rivals like HP, which used the 10 months it took for the deal to clear regulatory obstacles to ramp up efforts to lure Lenovo and IBM server customers. HP launched a program called Project Smart Choice aimed at IBM customers that may have had reservations about making the move to Lenovo.
Gerry Smith, executive vice president of Lenovo Group and president of Lenovo’s Enterprise Business Group and Americas Group, said during the conference call that the company expects to see results similar to those from Lenovo’s $1.25 billion acquisition in 2005 of IBM’s PC business, which helped propel Lenovo into the world’s largest PC vendor.
“This acquisition has many things in common with that groundbreaking deal,” Smith said. “Back then, our competitors said we could not win together. They said our cultures would clash. They said that our merger would fail. We proved them wrong on every count. Like Yuanqing said, we expect to repeat the same success we had in PCs as we expand into the enterprise.”
In the deal, Lenovo is getting blade servers and switches from IBM’s System x, BladeCenter and Flex System businesses, x86-based Flex integrated systems, NeXtScale and iDataPlex servers and associated software, blade networking and maintenance operations. IBM will keep its System z mainframes as well as its servers and storage systems based on its Power chips, Power-based Flex servers, PureApplication and PureData appliances.
As part of the agreement, Lenovo also will serve as an IBM OEM and resell some IBM products, such as IBM’s Storwize storage products, flash storage arrays and parts of the IBM software portfolio.
Lenovo is getting an established server business, but also one that has seen its fortunes fall a bit while waiting for the deal to close. According to IDC analysts, HP and Dell both saw revenues in the second quarter grow slightly from the same period a year earlier, while IBM’s slipped from more than $3.3 billion during the quarter in 2013 to $2.9 billion during the quarter this year. Its market share fell 10.2 percent, to 23.3 percent, dropping it behind HP’s share of 25.1 percent.
Lenovo, IBM to Close $2.1 Billion Server Deal Oct. 1
Lenovo officials implied that issues around revenue and inventory may have contributed to the deal price dropping from the original $2.3 billion to $2.1 billion at close, though they added that due to the “quiet period” leading up to earnings reports, they could not go into much detail. However, they did say that with the deal closing, any fear, uncertainty and doubt (FUD) that rivals like HP may have stirred up over the past 10 months can now be more forcefully answered.
HP officials on Twitter on Sept. 28 took a couple of more jabs at Lenovo and IBM, questioning whether Lenovo can “keep pace w/IBM’s product support” and whether the companies’ “happy partnership” will suffer once IBM and Lenovo “are essentially competitors.”
Yang and Smith said IBM’s strong brand and the IBM engineers and other employees who will make the move from IBM to Lenovo will give Lenovo a solid starting point for growing the business.
“One of the reasons we will succeed is our commitment to providing the most advanced and secure x86 technology available,” Smith said. “We can say this with great confidence because the IBM x86 System x business is coming over intact, including the IP, the vaunted security practices and the trusted executive team.”
Security has been a key focus over the past 10 months. U.S. lawmakers have been vocal about their suspicions regarding China and digital espionage, and are increasingly concerned about Chinese companies—such as Lenovo, Huawei Technologies and ZTE—being used as gateways by the Chinese government to gain access to U.S. networks. Lenovo and IBM had to satisfy the Committee on Foreign Investment in the United States (CFIUS)—a governmental interagency group that reviews the acquisition of domestic companies by foreign entities for national security purposes—before gaining approval for the deal.
Smith noted that Lenovo sells technology to almost every Fortune 100 company, saying that customers demand high levels of security. Lenovo is continually upgrading security policies and practices, he said.
“Even more, it’s no secret that Lenovo and IBM worked proactively to secure clearance from government agencies around the world,” Smith said. “Our success in all of these rigorous reviews presents the most credible, and strongest, endorsement of Lenovo’s corporate character, commitment to security, transparency and trustworthiness.”
The Lenovo executives, when asked during the conference call, would not say whether job cuts will follow the merging of IBM’s x86 business. Smith said the company’s goal is to make the Enterprise Business Group profitable and efficient.