Lenovo buys IBM's x86 server business for $2.3bn

By Graeme Burton
23 Jan 2014 View Comments
lenovo

Lenovo, the Beijing-based PC maker, is to buy IBM's low-end server business in a deal valuing it at $2.3bn (£1.4bn). Trading in shares of Lenovo were suspended earlier today, pending the announcement of a transaction, which occurred within the last hour.

The deal will see Lenovo purchase 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 for $2.3bn in cash and stock - about $2bn will be in cash.

Further reading

IBM will retain its System Z mainframes, Power Systems, Storage Systems, Power-based Flex servers, and PureApplication and PureData appliances.

Following the closure of the transaction, about 7,500 IBM employees around the world, including those based in Raleigh, North Carolina, Shanghai, Shenzhen and Taipei, will be offered positions at Lenovo.

Lenovo, meanwhile, will also assume customer service and maintenance operations, although IBM will continue to provide maintenance delivery on Lenovo's behalf for an extended period of time.

The Wall Street Journal, citing "people familiar with the matter", claimed yesterday that both Dell and Fujitsu also considered buying the business recently after the company revived a sale process that collapsed last year after IBM and Lenovo failed to agree a price for the deal in March last year.

The Wall Street Journal's sources indicated that price had also been a sticking point this time round, with Lenovo insisting that the unit is worth less than the $2.5bn price tag that IBM had reportedly put on the business last year.

However, the 16 per cent fall in x86 server sales in IBM's fourth quarter of 2014, which followed sales falls throughout the year in the low-margin business, may have persuaded the computer giant to accept a lower bid.

In a Hong Kong Stock Exchange statement, Lenovo chairman and CEO Yang Yuanqing admitted that the company was in "preliminary negotiations with a third part in connection with a potential acquisition".

Within the last hour, however, Lenovo has claimed that a deal had been struck.

"This acquisition demonstrates our willingness to invest in businesses that can help fuel profitable growth and extend our PC Plus strategy," said Yuanqing in a statement.

He continued: "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."

IBM, meanwhile, claims that it will focus on cloud computing, among other areas. "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 at IBM Software and Systems.

IBM sold its PC business to Lenovo in 2005 in a $1.75bn deal after years of falling sales. The move enabled Lenovo to expand its PC and laptop business dramatically, overtaking HP to become the world's number one manufacturer of PCs and laptops in 2012.

For IBM, while the company has increased its profitability in recent years through a programme of vigorous cost-cutting, overall revenue sales have been moribund. And analysts don't expect it to be the last hardware sale that the company will make.

"We predicted that when IBM exited PCs it would struggle with x86 servers. If it now exits x86 servers expect a struggle with storage," tweeted box counters Canalys.

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