Lenovo Pays $2.3 Billion for IBM’s Troubled x86 Server Business

IBM (IBM) and Lenovo finally agreed on a suitable price for IBM’s x86 server business, culminating a deal months in the making in which the Chinese PC maker will pay $2.3 billion for the unit, $2 billion of it in cash and the remainder in stock.

Last year, the two companies went back and forth on a possible buyout of the x86 business as snags surfaced over price, with IBM reportedly asking upwards of $6 billion for the business and Lenovo recoiling at that figure, looking at spending more like $2.5 billion for the unit.

The deal, which comes eight years after Lenovo bought IBM’s ThinkPad business in 2005 and ran with it, involves IBM’s System x, BladeCenter and Flex System blade servers and switches, x86-based Flex integrated systems, NeXtScale and iDataPlex servers and related software, blade networking and maintenance operations.

IBM will hold on to its System z mainframes, Power Systems, Storage Systems, Power-based Flex servers and PureApplication and PureData appliances.

Lenovo said it will offer jobs to some 7,500 IBM employees worldwide affected by the acquisition, including personnel located in Raleigh, N.C., and Shanghai, Shenzhen and Taipei, China.

The acquisition gives Lenovo an instantly recognizable presence in the x86 server market, and opens up new data center revenue sources for the vendor as it looks for safe harbors to compensate for the flagging PC market and its limited position in the smartphone and tablet segments.

IBM’s hardware business has posted a seven-quarter streak of worsening revenue declines, the latest of which is the 25 percent year-over-year tumble the vendor’s systems and technology group recorded on $4.3 billion in sales for its just reported Q4 2013. Of the hardware involved in the Lenovo deal, most notably System x sales fell 16 percent for the quarter.

Yet Lenovo thinks it can do better, just as it’s done with IBM’s PCs, said Yang Yuanqing, Lenovo chairman and chief executive.

“This acquisition demonstrates our willingness to invest in businesses that can help fuel profitable growth and extend our PC Plus strategy,” he said. “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.”

Peter Hortensius, Lenovo Think Business Group senior vice-president, said in a Reuters report the vendor’s plans to fix the x86 business involve “a variety of things, improve products, drive improved costs, and couple it with the scale we have and our PC business to improve go-to-market.”

Deal Goes Beyond Servers

Under terms of the agreement, the companies said they will collaborate on an OEM and reseller arrangement for sales of IBM’s Storwize disk storage systems, tape storage systems, General Parallel File System software and SmartCloud Entry offering. The agreement also includes a portion of IBM’s system software portfolio, including Systems Director and Platform Computing solutions.

Lenovo also will take over customer service and maintenance for the x86 business line and related products, although IBM said it will supply maintenance for Lenovo for an undetermined period in the interest of continuity for customers.

IBM expects unloading its x86 server business will enable it to allocate more resources to its software and cloud businesses, where it has the opportunity for greater margins. In its Q4 2013, IBM’s software revenue grew 4 percent to $8.1 billion compared to the same period last year. And, earlier this week, IBM pledged $1.2 billion to build 15 new data centers around the world to expand its SoftLayer cloud services into new markets.

“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,” said Steve Mills, IBM Software and Systems senior vice president and group executive.

According to researcher IDC, demand for x86 servers worldwide grew by nearly 3 percent in Q3 2013 to $9.5 billion worldwide, even though shipments remained flat at 2.2 million units. Hewlett-Packard (HPQ) is the segment leader right now with a 32.3 percent share, followed by Dell at 20.6 percent of the market and IBM with a 12.7 percent stake. Of the three leading vendors, only HP grew its x86 server revenue during the period, as Dell’s x86 server revenue fell 6 percent year over year and IBM’s tumbled more than 17 percent.

A big question remaining in the wake of the deal is whether it will help IBM chief Ginni Rometty, who’s now delivered seven consecutive quarters of declining revenue. We’ll have to wait and see on that one.