IBM Sells x86 Server Biz To Lenovo: History Repeating?

By - Source: Toms IT Pro

After months of waiting, IBM and Lenovo have finally come to a joint agreement that paves the way for Lenovo to acquire IBM's x86-server division. Lenovo, the global personal computer manufacturer that acquired IBM's PC division in 2005, will reportedly pay $2.3 billion in cash and stock for the acquisition once it goes through. This is pretty close to the estimates discussed in various articles in April 2013.

In today's announcement, IBM reaffirmed its ongoing strategic relationship with Lenovo and its intent to continue to support its software portfolio for the x86 platform, including both Windows and Linux operating system applications.

IBM identified the following product lines as part of the sale:

  • System x; 
  • BladeCenter and Flex System blade servers and switches; 
  • x86 Flex integrated systems;
  • NeXtScale (IBM's ultra-dense hyper-scale environment);
  • iDataPlex (enterprise web 2.0 and cloud computing) servers.

Interestingly, IBM announced updates to the System x Server line about a week ago, which means that Lenovo is getting IBM's very latest technology with this deal.

To help ease any concerns customers might have about receiving service during the transition of maintenance operations, IBM will provide support and maintenance delivery on Lenovo's behalf "on an ongoing basis -- for what they've sold to clients and for what they WILL sell to clients," according to a source at IBM. This will give Lenovo an opportunity to make a smoother transition of those operations without a negative impact to customers who need support for their x86 products.

In the announcement, IBM also mentioned that Lenovo will be offering jobs to the estimated 7,500 IBM employees connected to the x86-product line. While this is good news, expect some operational hiccups that always occur in these types of transitions.

Another part of the deal will turn Lenovo into a global Original Equipment Manufacturer (OEM) and reseller of IBM's entry level and mid-range Storwize disk storage system. This partnership will also include tape storage systems, General Parallel File System software, SmartCloud Entry offering, and elements of IBM's system software portfolio, including Systems Director and Platform Computing solutions.  

According to an Equity Research report from Wells Fargo Securities, the main competitor in the storage market is EMC; however, this partnership between IBM and Lenovo is not likely to worry EMC. Considering Lenovo is a Chinese based company, and EMC has a relatively small footprint in China, both IBM and Lenovo may see it as an opportunity to grow the storage business in that region.

This divestiture is strategic for IBM for several reasons. It will allow IBM to focus more on what it sees as future growth opportunities and profitable lines of business. IBM has stayed consistent in repeating its mantra of cloud, cognitive computing, and big data.

IBM invested almost $2 billion last summer for SoftLayer, which has become the foundation of the company's cloud strategy. Earlier this month IBM announced the creation of the Watson Group with an investment of more than $1 billion dollars in support of its cognitive application Watson and the creation of an ecosystem around it. Just three days ago, IBM announced its 2014 global cloud data center expansion plan and its investment of $1.2 billion to build 15 new cloud data centers.

The other reason for IBM to lose the x86 line is that it is not a profitable business for IBM and according to the Wells Fargo Equity research report, the low-end server line has shown a steady decline in sales over the past 10 months.

Although it seems counter-intuitive, the product that loses money for IBM can actually make money for Lenovo because of the one thing that Lenovo has and IBM does not: lower operating costs.

The transaction still requires various regulatory and contractual processes to be completed before the deal will be finalized and there was no specific date mentioned in the announcement. While these processes are completed neither IBM nor Lenovo will make any change in their server availability, sales, or maintenance and support.

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Bill Oliver has worked in IT as a techie, trainer, manager, and in business roles supporting IT for 20+ years.  For the past 12 years his focus has been on the business side of IT Contracts, Software Licensing, and all things related to IT Purchasing.

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