How We Got Here: Lenovo's Blockbuster IBM Server Deal

Deja Vu All Over Again

IBM, which sold its PC and ThinkPad notebook business to Lenovo nine years ago, has now agreed to sell its x86 server business to the Chinese computer giant in a $2.3 billion blockbuster deal.

The final deal comes nine months after CRN broke the news that IBM and Lenovo were in discussions to sell part of IBM's x86 server business to Lenovo.

And it comes just two days after IBM reported that sales of its x86-based System x servers were down 16 percent in the fourth quarter.

Lenovo, for its part, which has carved out a robust channel business for its ThinkPad line, has moved aggressively to build a server business outside of Asia with a strategic alliance with storage giant EMC.

What's New?

Lenovo plans to acquire IBM's System x, BladeCenter and Flex System blade servers and switches, x86-based Flex integrated systems, NeXTScale and iDataPlex servers, and associated software, blade networking and maintenance operations.

The acquisition thrusts Lenovo into the upper echelons of the server business, battling Hewlett-Packard and Dell. Approximately 7,500 IBM employees, including those based at major locations such as Raleigh, N.C.; Shanghai, Shenzhen and Taipei, are expected to be offered employment by Lenovo, the companies said.

Lenovo and IBM also unveiled a strategic relationship that includes a global OEM and reseller agreement for sales of IBM's entry-level and midrange Storwize disk storage systems, 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, the companies said.

What Has IBM Sold To Lenovo And What Is It Keeping?

The deal includes System x, BladeCenter and Flex System blade servers and switches, x86-based Flex integrated systems, NeXtScale and iDataPlex servers and associated software, blade networking and maintenance operations.

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

IBM will continue to develop and evolve its Windows and Linux software portfolio for the x86 platform. IBM is a leading developer of software products for x86 servers with thousands of products and tens of thousands of software developer and services professionals who build software for x86 systems.

IBM's x86 Server Business: Divestiture Redux

This is not the first time IBM has looked to sell its server business.

CRN last April first reported that IBM was actively negotiating to sell its x86 server hardware business, and Lenovo was the top candidate to buy it.

Lenovo later that month confirmed it was in talks to purchase a server business but declined to discuss who the seller was.

IBM at that time also mentioned during a meeting with financial analysts that it had plans to divest itself of poorly performing businesses.

However, by July, IBM said a large "divestiture project" was on hold, thereby squelching talks about a deal with Lenovo for the time being.

IBM And Lenovo Are Already Server Partners

IBM in 2008 signed an agreement to license its x86 server technology to Lenovo, letting Lenovo build one- and two-processor servers based on IBM's System x server technology.

Under that agreement, which covered rack-mount and pedestal servers but not blade servers, Lenovo already manufactures and sells Lenovo-branded servers based on the IBM technology. IBM also continues to manufacture and sell its own similar IBM-branded servers based on the same technology.

IBM also supports Lenovo's server sales with financing and maintenance and other services.

IBM Is No Stranger To Divestitures

IBM has a history of getting rid of poorly performing businesses and coming out stronger as a result.

IBM in 2004 brokered a deal to sell its PC division to Lenovo, a move that eventually led to Lenovo challenging Hewlett-Packard for PC market dominance.

IBM in 2002 sold its hard drive business to Hitachi to form Hitachi GST, which in 2011 was acquired by Western Digital.

IBM actually sold its printer business twice. IBM's original entry into the printer business ended in 1991 when it spun off its printing unit into what is now Lexmark. In 1995, IBM built its Printing Systems Division with a focus on high-end, production-level printing solutions, but in 2007 sold it to Ricoh.

x86 Servers: Lenovo Sales Small But Growing

Lenovo shipped about 45,000 servers worth a total of about $85 million to Asia -- its largest market by far -- in the third quarter of 2013, research firm Gartner told CRN. Worldwide sales reached about $109 million, Gartner said.

In the U.S., Lenovo's server shipments grew about one-third to reach 8,000 units in the third quarter, up from about 6,000 units in the third quarter of 2012. Lenovo's North American revenue reached $20 million in the third quarter, up from about $15 million a year before, Gartner said.

For Lenovo, the acquisition of even part of IBM's x86 server business would give it instant credibility as a global enterprise vendor. It also would make it a much more formidable competitor to archrival Hewlett-Packard.

x86 Servers: Not A Good Business For IBM

For IBM, getting out of the entry-level server business would probably be good news for its bottom line.

IBM's x86 server business is not just stagnating, it's tanking. Gartner in December estimated that IBM in the third quarter of 2013 sold a total of 185,634 x86 servers, enabling it to remain the No. 3 server vendor. However, that is down 29.8 percent over the 264,524 x86 servers it sold in the third quarter of 2012.

Almost as bad, IBM in the third quarter of 2013 had estimated revenue of nearly $1.2 billion from its x86 server business, down 17.6 percent over its prior-year revenue of more than $1.4 billion, Gartner estimated.

x86 Server Sales: Not Just An IBM Problem

Actually, the x86 server business as a whole is not an area of real growth, providing more impetus for companies like IBM to consider what their role in the industry should be.

Gartner said overall x86 server volume grew an anemic 2.1 percent in the third quarter of 2013 to nearly 2.5 million units worldwide. Revenue for those servers fared a little better, rising 4.4 percent to nearly $9.8 billion.

The Impact: Channel Partners

Many if not most of IBM's solution providers currently resell both IBM and Lenovo entry-level servers, so they are used to dealing with both vendors. For them, it will be important that IBM shows that it is committed to supporting Lenovo's server business post-acquisition, or they will risk losing enterprise server customers to competitors like HP or Dell.

"There is no question Lenovo is going to be able to turn IBM's failing server business around. ... Not only will IBM's cachet help us win in [the] SMB, it will allow me to crack my enterprise business open and make more money," said Lou Giovanetti, co-founder of CPU Sales and Service, a longtime Woburn, Mass.-based Lenovo partner.

The Impact: Government Sales

Watch the doors of U.S. federal government agencies close to IBM's x86 servers once they belong to Lenovo.

Analyst firm Sterne Agee Tuesday wrote in a research report that there is a general emerging thesis that the U.S. government cannot buy Chinese-made computer equipment due to security concerns.

The sale to Lenovo would likely benefit such vendors as Dell, HP and SGI, "especially within more sensitive U.S. federal agencies," Sterne Agee wrote. Cray and other providers of high-performance computing equipment typically built on x86 systems could also benefit.

"From a numbers perspective, the high performance compute server market is roughly $11 billion a year (separate from the commercial server markets) and IBM owns about 30 percent of the $11 billion [market]. HPC is highly concentrated with government verticals so the impact could be noticeable over time for smaller vendors," Sterne Agee wrote.

The Impact: EMC

EMC in August 2012 unveiled a strategic relationship with Lenovo under which EMC would offer its server expertise to Lenovo while Lenovo would provide servers to be used for building EMC's storage hardware.

Lenovo servers are now being designed with hooks to EMC software to make them better optimized for EMC's storage business than non-Lenovo servers. With Lenovo's purchase of IBM's x86 server business, all of a sudden EMC's storage software business could receive a huge boost in terms of addressable market.