Lenovo Seals Deal for IBM’s x86 Server Unit - Channelnomics

Lenovo CEO Yang Yuanqing

Lenovo CEO Yang Yuanqing

Add Lenovo to the list of major server vendors. The world’s largest PC maker by sales is now a major contender in the low-end server market after agreeing to buy part of IBM Corp.’s hardware business for $2.3 billion.

IBM, which has seen overall sales decline for seven consecutive quarters, has been trying to sell its x86 server unit — which includes System x, BladeCenter, Flex System blade servers and switches, NeXtScale, iDataPlex and associated software, blade networking and maintenance operations — since last summer.

The deal makes Lenovo the third-largest x86 server vendor in the world, just behind Hewlett-Packard Co. and Dell Inc. It also places Lenovo among the world’s leading overall server vendors, which includes Cisco Systems Inc. and Oracle Corp. And, it will likely mean IBM will surrender its crown as the world’s largest server vendor to HP.

Lenovo has long been a contender for the unit, as it’s seen as the natural fit after striking a similar deal with IBM nearly 10 years ago to buy the PC unit. That 2005 deal, worth $1.3 billion, catapulted Lenovo to the top of the global PC market. Initial talks last year broke down over price. In recent weeks, talks rekindled as Lenovo and Dell were reportedly looking to pick up the unit.

While Lenovo has servers already, it’s a minor part of its overall business compared to PCs, tablets and smartphones. With the IBM assets as cornerstone, Lenovo aims to become the world’s largest server vendor. Over the next three years, it plans to expand the 13 percent market share currently held by IBM by between 5 and 10 percent.

“We are confident that we can grow this business successfully for the long-term, just as we have done with our worldwide PC business,” said Yang Yuanqing, Lenovo’s chairman and CEO, in a statement.

The deal comes as server sales continue to decline. According to IDC, overall server sales fell between 6 percent and 7 percent in 2013, with IBM experiencing some of the biggest declines. For most companies, such declines would make a deal like this unpalatable. However, Lenovo has thrived and become the world’s largest PC vendor as the overall market declined by much steeper rates over the last two years.

While Lenovo is taking over the x86 server business, IBM isn’t walking away entirely. The deal includes provisions for IBM to provide Windows and Linux application development for Lenovo. Additionally, IBM will continue to offer customer support through the transition period.

IBM will retain its high-end servers and mainframe systems, including System z, Power Systems, Storage Systems, Power-based Flex servers, and PureApplication and PureData appliances.

No word on how the deal will affect reseller partners. Lenovo will likely follow a similar transition as happened when IBM sold the PC division. Lenovo has a history of slow and steady migration and integration of channel programs, as it aims to avoid disruptions of current sales and revenue.

Divesting of the underperforming x86 server unit will allow IBM to devote more resources and attention to its transition to cloud services and advanced computing technologies. In recent weeks, IBM announced multibillion-dollar investments in expanding cloud computing hosting resources and the development of its Watson artificial intelligence technologies.

“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 of IBM Software and Systems.

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