For IBM and Lenovo, System x Marks the Sweet Spot

In case you missed last week’s announcement that Lenovo would be acquiring IBM’s System x x86 server business, here are some of the details:

• Lenovo is acquiring IBM’s x86 server hardware business for US$2.3 billion, approximately $2 billion of which will be paid in cash and the balance in Lenovo stock. The assets covered by the deal include the System x rack servers, BladeCenter and Flex System blade servers and switches, x86-based Flex integrated systems, NeXtScale and iDataPlex servers and associated software, Enterprise X-Architecture technologies, and blade networking and maintenance operations;
• IBM will continue to develop and evolve Windows and Linux software for x86 platforms. It will retain its System z mainframes, Power Systems, Storage Systems, Power-based Flex servers, and PureApplication and PureData appliances;
• Approximately 7,500 IBM employees, including those at major locations such as Raleigh, Shanghai, Shenzhen and Taipei, are expected to be offered employment by Lenovo;
• The companies plan to enter a strategic relationship that will include a global OEM and reseller agreement for Lenovo to sell IBM’s entry 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. In turn, Lenovo will become IBM’s preferred vendor of x86 server solutions.

Timing, Price, Scope

Rumors of a deal had been floating around for months, and though a few new permutations recently arose around Dell’s supposed interest, most assumptions focused on the timing, scope and price of a deal instead of its likelihood.

Timing: While this was partly practical — you don’t hammer out a multibillion dollar agreement or exit a major market overnight — the deal also did not impinge on two recent major IBM announcements: the $1 billion funding and launch of its new Watson Project and business unit, which hit the news earlier this month; and the previous week’s reveal of plans to invest $1.2 billion in a major expansion of its global cloud services data center infrastructure.

The deal highlights Lenovo’s ongoing progress in developing data center solutions and also punctuates the business endpoint announcements Lenovo made at CES 2014. Bottom line: The timing of the announcement was good for both companies.

Price: At first glance, the $2.3B price tag seems on the low side, since it encompasses IBM’s entire System x hardware portfolio, including the highend Flex Systems and new sixth-gen EXA technologies. That may be the case, but final prices depend more on buyer willingness than seller desire.

There was speculation that IBM would hold back the Flex System and EXA assets — but from a competitive standpoint, Lenovo would have been foolish to settle for anything less than the whole package, since high-end offerings deliver distinctly better value and margins than high-volume solutions.

The price is at least partly mitigated by IBM deepening its relationship with a long-trusted strategic partner. If and when IBM customers want x86 servers, Lenovo can supply them. Plus, agreeing to resell IBM storage solutions could be good news for that portion of IBM’s hardware business.

More tangibly, the proceeds of the sale essentially will pay for IBM’s new Watson project and business unit, as well as its cloud data center expansion efforts announced earlier this month. Bottom line: The price is good for both companies.

Scope: Lenovo has long manufactured its own volume ThinkServer solutions — some of which leverage IP licensed from IBM — but the deal provides the company immediate access to a full complement of market-tested System x volume servers and enterprise rack systems, blade systems and integrated systems/appliances (BladeCenter and Flex), highly dense systems (NeXtScale and iDataPlex), high-end memory/throughput technologies (EXA) and complementary networking solutions.

That will make Lenovo an immediate player in numerous markets that were well-beyond its previous grasp. While IBM has long trailed Dell and HP in volume x86 servers, it has been the market leader in 4-way and above x86 server solutions for years, a position Lenovo should now fill with ease.

The deal also allows IBM to gracefully exit an x86 server market it considers essentially commoditized, keeping to an established strategy that saw previous sales of once-core company solutions, including PCs, hard disk drives and enterprise printers.

Finally, selling System x should help IBM focus its attention and resources on the cloud services and cognitive computing solutions it believes are central to its future success. Bottom line: The deal’s scope provides good value to both companies.

Critical Relationships

Perhaps the most important aspect of this acquisition, as with every IT deal, is the human element. Lenovo’s expecting to employ some 7,500 current System x employees based in Raleigh, Shanghai, Shenzhen and Taipei, including System x leadership, management and sales executives. This reflects the strategy Lenovo pursued after purchasing IBM’s PC division in 2005, and it is absolutely critical from a business continuity standpoint.

Those IBM workers deeply understand the System x portfolio, and they have practical, ongoing relationships with IBM customers that would be difficult or impossible to replicate.

Overall, this deal will yield positive results for both companies. It allows IBM to gracefully exit an increasingly commoditized market, repays its significant investments in x86-based system development, extends and deepens its relationship with a long-trusted strategic partner, and allows it to concentrate its resources on long-term goals and market opportunities.

The deal offers Lenovo near-immediate entry into high-value business IT markets. The migration of System x executives, managers and workers to Lenovo should place it in good stead with existing and prospective customers, and contribute substantially to its future success.

In fact, if Lenovo can achieve with IBM’s System x solutions what it has accomplished with IBM’s PC assets, the result could be a significant reordering of the businesses and expectations associated with Industry Standard x86-based servers and solutions.