Wheelings & Dealings: Lenovo New x86 Powerhouse, Seals IBM Server Deal

Last year Lenovo (News - Alert) tried to buy IBM’s low-end x86 server business for $2.5 billion, but Big Blue thought that offer was small potatoes. A year later that money doesn’t sound so bad, and in fact Lenovo has now officially struck a deal to buy the exact same business for a just a smidge less, $2.3 billion is the new number.

While it sounds like Lenovo may have struck a bargain, the IBM (News - Alert) business is worth far less than it was a year ago. Rather than growing like a good business should, Big Blue’s commodity server sales fell 16 percent in what was a disaster of a fourth quarter. Dell (News - Alert) had previously been rumored to be interested in buying the IBM line.

Lenovo, having had great success after buying IBM’s PC line in 1995, hopes for the same with servers. In fact, Lenovo already has a strong server line in addition to PCs, laptops and workstations.

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

Like the PC before it, commodity servers no longer fit IBM’s business model which is focused on higher-end software and tools, proprietary hardware such as mainframes, services and value-add.

“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 and Group Executive, IBM Software and Systems. “IBM has a proven record of innovation and transformation, which has enabled us to create solutions that are highly valued by our clients.”

Lenovo isn’t just picking up the products, but plans to offer some 7,500 IBM workers jobs.

IBM doesn’t have just one x86 line, but a series of products. Lenovo is actually buying BladeCenter and Flex System blade servers and switches, System x, and iDataPlex and NeXtScale servers.

Two of the big proprietary lines IBM will focus are Power-based system and System z mainframe computers.

And the higher-end servers are also better candidates for IBM Global Services, which helps companies migrate legacy server infrastructures to IBM offerings. As one of the largest software companies in the world, IBM will remain active in building x86 applications and tools that run on Linux and Windows.

While IBM is divesting low-end servers, it is pumping up its supercomputer business by investing over $1 billion in IBM Watson.

So Was it a Good Deal?

Experts have valued the IBM asset at between $2.5 billion (Lenovo’s exact original offer) to $4.5 billion. The annual revenues are round about $5 billion, so at the high end the value would be roughly that of revenues, with no multiple. This is indicative of a low growth commodity business, and in fact it is a business that for IBM is plunging. And at $2.3 billion, Lenovo paid less than many analysts expected.