US$2.3 billion deal covers commodity servers, letting IBM focus on cloud services

IBM has wanted to focus more on offering a range of cloud computing services for some time. It found a way by getting out of the x86 server business.

The company announced a deal this morning with Lenovo – which in 2005 bought IBM’s PC business—to sell it the x86 server and networking division for US$2.3 billion.

When completed the deal will still leave IBM in the server market with its Power Systems, System z mainframe and storage systems. But the leading server manufacturers by volume will be Lenovo, Cisco Systems Inc., Dell and Hewlett-Packard.

The deal comes after IBM’s US$2 billion acquisition of SoftLayer Technologies cloud service, giving it increased ability to offer cloud-based services to enterprises, the creation of its Watson cognitive computing cloud service and the US$1.2 billion investment to expand IBM’s number of existing data centres.

IBM said in addition to focusing on cloud products and services it will also concentrate more on “high value products for enterprise clients” including big data, analytics and security solutions.

x86-based servers are the biggest sellers in the business computing market. However, that also means they are under increased pricing pressure that results in lower margins for manufacturers. At the same time infrastructure cloud services like Amazon Web Services and Microsoft Azure, and software as a service offerings like Salesforce.com are siphoning away traffic from corporate data centres.

It was only this week that IBM’s fourth quarter results showed a 12-month 25 per cent slide in its hardware business, while at the same time a 69 per cent leap in revenues of its Internet-based services offerings. In a report analyst Krista Macomber of Technology Business Research wrote that “If ever a bellwether, IBM’s Q413 financial performance reflects industry disruption by adoption of public cloud delivery models and software-defined commodity hardware.”

In short, a significant part of the business world is saying ‘who needs on-premise hardware?’ — or at least saying they need less of it.

The sale covers IBM System x — which the company just upgraded this week – 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.  Lenovo will also be able to sell IBM storage systems under its brand. The purchase price is approximately US$2.3 billion, approximately $2billion of which will be paid in cash and the balance in Lenovo stock.

The deal is expected to take six to nine months to get regulatory approvals in several countries.

Analyst David Senf, vice-president of IDC Canada’s infrastructure solutions group, notes that Lenovo is picking up a well-maintained division. In Canada IBM has a 19 per cent share of the x86 server market, compared to nine per cent in the U.S. (HP is the number one x86 server vendor by revenue in Canada with 36 per cent of sales, followed by Dell with 26 per cent, IBM, Cisco with eight per cent, Oracle with five per cent and Lenovo with one per cent.)

Lenovo already sells x86 servers, he noted, of the one socket and low-end two socket variety with an average price of $1,800. By comparison the x86 servers from IBM it’s picking up have an average selling price of $8,000.

Some 7,500 IBM staff around the world will be offered jobs by Lenovo.

IBM [NYSE: IBM] will continue to develop and its Windows and Linux software portfolio for the x86 platform, the company said.

While Lenovo will take over related customer service and server maintenance operations, IBM will continue to provide maintenance delivery for Lenovo “for an extended period of time,” the companies said in a news release.

“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, senior vice-president of IBM’s software and systems division. “IBM has a proven record of innovation and transformation, which has enabled us to create solutions that are highly valued by our clients.”

Lenovo chairman and CEO Yang Yuanqing said the deal “demonstrates our willingness to invest in businesses that can help fuel profitable growth and extend our PC Plus strategy. 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.”

The deal could be good news for Cisco Systems Inc., Hewlett-Packard Co and Dell, says Wayne Pauley, a senior analyst at the Enterprise Strategy Group. The three will likely be calling IBM accounts looking for customers willing to switch to their servers.

On the other hand, he added, the deal raises the question of whether x86 servers are truly commodity products. Dell and HP have been struggling financially in the past two years — HP has seen revenue drop, Dell took it self private — so arguably the industry is getting close to that point.

IBM presumably thinks so: Pauley noted that IBM’s timing to get out of the PC market seven years ago was “impeccable.”

Meanwhile, with Lenovo in a close partnership with storage and virtualization vendor EMC Corp., he wonders if another big announcement is coming soon.

James Alexander, an analyst with London, Ont.-based InfoTech Research, noted the deal opens the Chinese market for what had been IBM x86 servers — and IBM still has a stake in Lenovo, he pointed out, so it helps both companies.

Lenovo, because of how and where it operates with a much lower cost per employee, will be able to operate the former IBM server business much more efficiently from a distribution and manufacturing perspective, he added. For them, if they can survive in the cut-throat world of endpoint devices, servers probably represent an uptick in terms of the margin they’re able to generate.

(With an add from Jeff Jedras, Computer Dealer News)

 

 

 

 

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