This is going to be interesting. Today, IBM and Lenovo announced that they’ve gotten through the regulatory hurdles put in front of them and now the companies can move forward with Lenovo’s acquisitions of IBM’s x86 server division. Lenovo and IBM gain from this deal, which will redefine both companies going forward and potentially strengthen the partnership between them. Let’s revisit this deal and look forward to what it promises for the future for both companies.
The Deal for IBM and Lenovo
To recap, the deal transfers the IBM x86 server business to Lenovo; on October 1st this deal is now expected to close, at a price of $2.1 billion. Lenovo gets System X, BladeCenter, and Flex System blade servers and switches, X86-based Flex integrated systems, NeXTScale and iDataPlex servers and associated software, and blade network and maintenance operations. In addition, once the deal closes, Lenovo will be a global OEM and reseller of IBM’s entry and midrange Storwize disk storage and tape storage systems.
IBM will continue with its System Z mainframes, Power systems, storage systems, Power-based Flex servers, and PureApplicaton and PureData appliances. IBM’s Windows and Linux software portfolio for x86 systems will also stay with IBM and it will continue to develop these offerings.
What This Solves
For IBM, it removes an operational problem. Unlike HP and Dell, IBM doesn’t have a PC business anymore and thus can’t get the same volume discounts as its x86 competitors. In addition, x86 servers are very low margin compared to IBM’s other offerings, which meant it didn’t have competitive costs; the x86 server group was bottom of the pile when it came to getting resources and funding because that group was less profitable than its peers. Long term, it simply couldn’t compete.
For Lenovo, its competitors, HP and Dell, could offer solutions that extended from PCs to servers and while Lenovo was slowly building a server business, and actually had some decent servers, it would be years if not decades before it would be seen as a server peer to its competitors.
In addition, IBM was having trouble selling in China and Lenovo selling in the U.S., largely because the two countries aren’t on the best of terms. Both firms are now committed to helping each other because their long-term interests are now tied to each other.
In short, for IBM, the x86 division was a relatively unprofitable distraction, but for Lenovo it was a critical asset. The division goes from being a relatively low-margin division fighting for respect to a relatively high-margin unit at the top of Lenovo’s technology portfolio. For the x86 management team, and I know some of them, it is like they died and went to heaven.
Risks of the Deal
The risks are actually relatively low because Lenovo has already been tested with a similar deal with the IBM PC Company. While a lot of folks were convinced this would be a disaster, it wasn’t. ThinkPads remain the gold standard for business-focused PCs. I actually can’t remember when we’ve had a case in the past when a near identical sale had already been tested and fully vetted in both markets.
Now, while any large-scale organizational change has risks, and the sale of a unit, merger or an acquisition is typically one of the most risky, because this one has been unusually well vetted (thanks to the PC Company sale), it is less risky than any I’ve yet covered.
Wrapping Up: Signs Point to the Deal’s Strategic Success
Typically, we spend a lot of our time talking about companies suing each other or partnerships or mergers that don’t work. This sale and acquisition follows an unusually well-tested path that was uniquely already blazed by both firms. It addresses strategic problem both firms had before the merger and benefits both the employees of the transferred organization and their customers because the unit increases in status and access to corporate resources. Finally, the level of risk is historically low, making this sale and merger uniquely fascinating and successful.
Rob Enderle is President and Principal Analyst of the Enderle Group, a forward-looking emerging technology advisory firm. With over 30 years’ experience in emerging technologies, he has provided regional and global companies with guidance in how to better target customer needs; create new business opportunities; anticipate technology changes; select vendors and products; and present their products in the best possible light. Rob covers the technology industry broadly. Before founding the Enderle Group, Rob was the Senior Research Fellow for Forrester Research and the Giga Information Group, and held senior positions at IBM and ROLM. Follow Rob on Twitter @enderle, on Facebook and on Google+