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Summary:

For $2.3 billion in cash and stock, Lenovo will get System x, BladeCenter and Flex System blade servers and switches and more.

Flagship

At least some of the reports were correct. IBM will sell its x86 server business to Lenovo, the Chinese-based company that already owns IBM’s old PC and laptop business.

The price is $2.3 billion, two billion of which will be in cash, the rest in Lenovo stock. For that Lenovo will get

“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 storied mainframe franchise, as well as Power Systems, Storage Systems, Power-based Flex servers, and PureApplication and PureData appliances, according to IBM’s statement. And it will partner with Lenovo to resell IBM storage which, Wells Fargo Securities analyst Maynard Um thinks will help IBM storage sales worldwide, but most especially in China.

The big question is if the two companies will make a similar co-selling pact on X86 servers. As much as IBM would like to think so, not every account is going to go for POWER RISC-based servers. In fact, the entire RISC market has been under pressure since the economic downturn, said Gartner research director Errol Rasit.

Intel and AMD X86 processors make up nearly 98 percent of the global server market, so while the margins may not be huge, the market is

Update: It turns out IBM will not resell Lenovo’s rack-and-tower X86 systems as general-purpose servers but it’s more nuanced than that. IBM will incorporate the Flex chassis (formerly from IBM and now from Lenovo) in its PureData and PureApplication appliances and it will use Lenovo’s X86 rack-and-tower servers in “strategic outsourcing engagements, in our internal infrastructure and in production systems that incorporate x86 servers,” according to an IBM spokesman.

“Lenovo is the big winner here because it instantly becomes a credible enterprise data center play,” said analyst Patrick Moorhead, founder of Moor Insights & Strategy.  Lenovo have to reassure IBM X86 customers since both Dell and HP will woo them aggressively, he said. “IBM is taking a huge risk as their Power architecture will be challenged to keep up with Intel and AMD.” 

About 7,500 IBMers in Raleigh, N.C., Shanghai and Shenzhen in China, and Taipei, Taiwan, be offered jobs at  Lenovo, according to the New York Times’ Dealbook.

It’s been clear for some time that IBM wanted to exit this low-margin, high-volume business — the question was how.  On IBM’s fourth quarter earnings call on Tuesday night, CFO Martin Schroeter acknowledged that, “hardware continued to impact our overall business.”

Lenovo took a look at the server business last year, as has been widely reported, but no deal came about. Then things got cooking in the last few weeks with Dell and Fujitsu as well as Lenovo all in the mix.

The story line is that IBM will now focus on higher margin-cloud and related services and higher-end hardware as well as its huge global services business. IBM is talking big about Watson, its super-genious AI software — and just launched a new division dedicated to that offering.

IBM CEO Ginni Rometty said she expects that business to generate $10 billion over the next decade. But that will be no mean feat.  The Wall Street Journal reported that Watson has generated just $100 million in revenue over three years and I hear things may be even more dire than those numbers indicate.

With commodity servers out of the way, IBM can, in theory hunker down and focus on key things like cloud and smart software — but focus has been difficult for IBM, a gigantic company, in the past. And its cloud focus must be sharp as it faces off against not only traditional IT rivals Hewlett-Packard, Dell and Microsoft but public cloud colossus Amazon Web Services.

The companies will host a conference call on the deal at 11:30 a.m. EST.

Note: This story was updated several times during the day and finally at 11:34 a.m. PST with more detail from IBM over how it will work with Lenovo X86 systems going forward.

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  1. or about $1 billion less than what Google bought Nest for.

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