Hong Kong-listed Lenovo issued a surprise suspension notice at 9:00am yesterday to temporarily stop trading. This was followed by the company's announcement of a $2.3 billion acquisition of IBM's x86 server hardware and related maintenance services. About $2 billion of the overall price will be paid in cash, and the balance in Lenovo stock. The announcement comes after several months of speculation, involving Lenovo, Fujitsu and IBM.

Lenovo's shopping basket includes System x, BladeCenter, and Flex System blade servers and switches. It will also include x86-based Flex integrated systems, NeXtScale and iDataPlex servers and associated software, and blade networking and maintenance operations. IBM said it will keep its System z mainframes, Power Systems, Storage Systems, Power-based Flex servers, and PureApplication and PureData appliances.

The deal comes nine years after the Chinese OEM bought IBM's ThinkPad PC line for $1.75 billion. Since 2012, Lenovo has become the world's leader in PC sales, collaborating with IBM in many areas.

Some analysts praised as a win/win deal IBM's decision to sell its Intel-based server business to Lenovo for $2.3 billion. They agreed that the move lets IBM focus on its higher-margin Power and proprietary servers, while Lenovo extends its market for high-volume x86-based systems that have arguably become high-tech commodities.

IBM's PC server unit posted seven straight quarters of losses as customers increasingly switched to public cloud computing services. The unit posted a $26.4 million loss after taxes for 2013.

"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," Yang Yuanqing, chairman and CEO of Lenovo, said in the release.

Steve Mills, senior vice President and group executive for IBM Software and Systems, said in the release: "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."

According to Gartner, IBM had the second-largest share of the $12.3 billion worldwide server market in third quarter, with 22.9%. HP ranked first, with 27.6%.

IBM recently announced that it will invest more than $1 billion in the new Watson analytics group and $1.2 billion to expand its global cloud computing footprint.

"I think this is a good deal all around," Linley Gwennap, founder and principal analyst at the Linley Group, told us. "The [x86] server business really aligns more with Lenovo's business model. For IBM, this allows them to focus more on the higher value server products that use their Power processors, rather than these lower cost commodity servers."

The x86 server market is becoming commoditised. "It's been difficult to make much of a profit in that market." Intel has "huge profit on the processors, but that doesn't leave much room for the server makers to make much profit themselves." he said. "When you look at what Dell or HP or IBM is offering, they are selling pretty much the same thing. That kind of commoditisation tends to reduce the profits considerably."

To gain from the deal, Lenovo may have to move much of IBM's manufacturing in Virginia to this region, perhaps leaving some R&D in the United States. IBM said Lenovo will offer jobs to 7,500 of its employees around the world. It did not say whether any employees will lose their jobs as a result of the sale.

Sameh Boujelbene, a senior analyst at the Dell Oro Group, told us, "I'm not really so happy for this acquisition, because it will only put further pressure on margins and ASPs." That said, she characterised the deal as a win/win, because it lets IBM focus on higher-margin businesses such as its new Watson analytics group. Lenovo should see benefits "at least for the next couple years... Lenovo is powerful in China and the growth in the server market is in China."

Taking issue with Gwennap, Rich Wawrzyniak, an analyst with Semico Research Corp., told us the server business is a good one—for companies such as Lenovo. "The growth rates just aren't matching up with what IBM is looking for. Is it a good idea? That remains to be seen." Servers are not yet a commodity. "There's a lot of maintenance required, [and] you have to be up on software, and you have to have the infrastructure to maintain the thing."

Another analyst (who requested anonymity because of investments in IBM) said the deal "may have more to do with the issues IBM is having, rather than whether the server business is a good or a bad business." It was motivated by IBM's "terrible" earnings. "They need investment gains from selling the business."

Access to IBM technology gives Lenovo "instant credibility in the enterprise market," putting more pressure on HP and Dell to lower costs, the analyst said. In addition, Lenovo may find it easier to sell its x86 servers to Chinese customers, who would want to buy from local vendors.

The transaction is subject to certain conditions, including approval by the Committee on Foreign Investment in the United States. IBM said in the release that Lenovo would "assume related customer service and maintenance operations." IBM would "continue to provide maintenance delivery on Lenovo's behalf for an extended period of time."

By: DocMemory
Copyright © 2023 CST, Inc. All Rights Reserved