From System X to System Ex

By Graeme Burton
31 Jan 2014 View Comments

When PC maker Lenovo finally slapped down $2.3bn in cash and stock to buy IBM’s System X server business in mid-January, it didn’t exactly come as a surprise. Ever since IBM flogged its PC business to Lenovo in December 2004 it was expected that the company would sooner or later also be compelled to sell off its x86 server systems unit, too – with Lenovo first in the queue of likely buyers.

The deal will mean the transfer to Lenovo of IBM’s 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.

Further reading

At the same time, Lenovo will also OEM IBM’s storage systems so that it can continue to sell them to System X customers – preventing EMC or Hewlett-Packard from muscling in on that part of IBM’s patch, at least for now.

Talk of a deal between the two had been bubbling away for the past year, with Lenovo reportedly walking away from a deal in March 2013, baulking at the $2.5bn price tag pinned on the business.

Since then, however, IBM’s hardware sales have continued to struggle and with margins thinnest in low-end servers, IBM has been prepared to accept a lower price for the business: $2bn in cash topped up with $300m in Lenovo stock.

The raw figures must make uncomfortable reading for IBM.

Three years ago, revenues at IBM’s Systems and Technology group, which included System X, stood at $6.3bn. In the fourth quarter of 2013, they had fallen by one-third to just $4.3bn.
System X sales, for which IBM only provides percentages of growth or decline, grew by 30 per cent three years ago. During 2013, however, sales fell throughout the year, culminating in a 16 per cent decline in the fourth quarter, its seventh consecutive quarterly sales fall.

According to Alastair Edwards, principal analyst at Canalys, such a deal was “inevitable” since IBM offloaded its PC division because that sale removed significant economies of scale. “There’s a link between volume PC sales and volume server sales,” he says. This doesn’t manifest in terms of purchasing microprocessors and motherboards, but across the whole supply chain, including the sales channels where both PCs and servers are sold.

But it doesn’t end there. Shorn of x86 servers, there are now questions hanging over the long-term viability of IBM’s storage division. Although these have been put off by the concomitant strategic partnership deal between the two companies, which will lead to Lenovo reselling IBM storage hardware, they won’t go away. If Lenovo doesn’t develop its own storage hardware as an alternative, it will almost certainly be back in for IBM Systems Storage too, at some point in the future.

Power systems running AIX Unix and System Z mainframe hardware are a different matter, though, believes Edwards. “Hardware in the Unix and mainframe spaces are more integrated with the applications they run and the workloads that IBM is supporting.”

However, he adds: “Those businesses are also struggling. Power Systems face competition on the x86 side, and there’s also the growing impact of cloud providers, as well as economic pressures, because they are expensive. Their core customers are looking for the most cost-effective solutions to provide the hyper-scaled computing they need to support their applications.”

Sooner or later though, Power systems will be following System X, PCs, networking and the hard-disc drive business out of IBM’s door, believes Edwards.

Just as Kodak used to be synonymous with cameras and Xerox with photocopiers, IBM has always been associated with computers. But IBM might not even be making computers in five or 10 years’ time. 

For Lenovo, meanwhile, the purchase represents a low-cost shortcut to greatness: “It gives us full end-to-end capabilities in development, sales and linking that come together in a very strong supply chain. Frankly, it would take us five years to build up something similar [on our own],” Peter Hortensius, a senior vice president at Lenovo, told Computing.

Lenovo also enjoys some operational advantages over IBM, says Edwards. It’s a leaner organisation, and is under less investor pressure to raise margins on the one hand, while now that it has a globally established PC business it also enjoys the economies that such high volumes drive.

Over the past 10 years, it’s also built up the kind of broad channel outside of China across the SME and mid-market that IBM has always lacked. That may not be good news, therefore, either for troubled HP or newly privatised Dell.

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