News & Insights for the AI Journey|Tuesday, March 19, 2019
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Uncle Sam Approves IBM X86 Server Biz Sale To Lenovo 

Big Blue has cleared the last major hurdle block its proposed $2.3 billion sale of its System x X86 server business and the licensing of key software and storage technologies to Lenovo Group.

IBM issued a statement last Friday that the Committee on Foreign Investment in the United States (CFIUS), a regulatory body that looks at investment by and sale to foreign corporations where national security interest come into play, has given a green light to the deal.

"The clearance by CFIUS of this transaction is good news for both IBM and Lenovo, and for our customers and employees.  The parties now look forward to closing the transaction," IBM said in its statement.  "The approval of the $2.3 billion sale to Lenovo enables IBM to focus on system and software innovations that bring new kinds of value to IBM clients in areas such as cognitive computing, Big Data and cloud, and provides clarity and confidence to current x86 customers that they will have a strong partner going forward."

Lenovo also put out a statement confirming the approval of the System x business unit sale as well as its acquisition of the Motorola Mobility smartphone business from Google, which was announced earlier this year as well. "We remain on track to close both deals by the end of the year," Lenovo said in its short statement. "Out of respect for the confidentiality of the process, we will not have any further comment until we have met all conditions for closure."

In addition to the CFIUS approval in the United States, the IBM-Lenovo deal needs the approval of regulators in China, the European Commission, and Canada. Europe and China had previously approved the deal.

IBM has made no secret of the fact that it wants to divest itself of low-margin businesses and focus on products where it can extract higher profits. It has gotten out of the printer, memory chip, networking, disk drive, PC, and point-of-sale businesses over the past decade and focused increasingly on software and services, which yield higher profits per unit of revenue. The writing has been on the wall for the System x division for many years, and IBM has been shopping the unit around at least since CEO and chairman Ginni Rometty took the helm several years ago.

The word on the street back in April 2013, when rumors first surfaced about a possible deal with Lenovo on the server front, was that IBM initially wanted between $5 billion and $6 billion for the business, which makes it the number three server shipper in the world and which gives it sufficient revenues such that when added to its mainframe and Power Systems lines it has the largest sales of systems in the world as well most quarters. Declines in mainframes and Power Systems are expected given their product cycles, but the rumored sale and then the actual deal selling off the line to Lenovo have all combined to hurt IBM's revenue share in the past several quarters. Hewlett-Packard, Dell, and Cisco Systems have picked up most of the slack, but are bracing themselves for a very tough competitor in Lenovo which can, unlike IBM, flex its supply chain and manufacturing muscle.

Back in June, rumors were going around and reported in the Wall Street Journal that US government officials and members of the CFIUS panel were worried about security backdoors in System x servers once the deal was approved. This nationalistic talk is constantly going on in the server and networking business, and the irony, as System x division general manager Adalio Sanchez told EnterpriseTech when the Lenovo deal was announced in late January, is that a large percentage of X86 servers are manufactured in China already. So this issue was essentially moot.

Under the deal, Lenovo is acquiring not just IBM's System x rack and tower servers based on X86 processors from Intel and AMD, but also its BladeCenter blade servers, which date from the early 2000s and which are still widely deployed, its iDataPlex systems for HPC centers and cloud operators, its Flex System modular systems for enterprises, and its new NextScale hyperdense and modular machines that are the follow-ons to the iDataPlex iron. All told, these businesses generated $4.85 billion in revenues for Big Blue in 2013, according to statistics from Gartner, down 13.6 percent from $5.61 billion in 2012. IBM has lost share to Cisco because it was late to counter the UCS integrated server-switch platform, which launched in 2009 and which is now at a $3 billion annual run rate. (HP and Dell have taken their lumps here as well.) The original design manufacturers have largely taken control of the 20 percent of X86 server shipments that go to the hyperscale datacenter operators, and this has also put pressure on IBM, HP, and Dell. IBM will resell the Flex System machines in its Pure Systems line, with Lenovo acting as its manufacturer.

For $2.07 billion in cash and $230 million in stock, Lenovo will get all of those products and will also assume responsibility for 7,500 employees who work for the System x division around the world. The deal also includes licenses to IBM's General Parallel File System (which is being rebranded as Elastic Storage by Big Blue these days), its SmartCloud Entry cloud controller, its System Director server management tool, and the Platform Computing portfolio of cluster management and Java grid messaging products. Lenovo has also licensed the rights to OEM and resell IBM's Storwize disk arrays, which are a key component of the Flex Systems. And finally, Lenovo is taking control of IBM's nascent homegrown switch business, which was based in large part on its acquisition of Blade Network Technologies (a spinoff from Nortel Networks) nearly four years ago.

Lenovo is doing the deal not just to expand globally, but to secure a larger portion of its home server market in China. Based on IDC projections, Lenovo said back in January when the deal was first announced that the X86 server market was expected to grow at a compound annual rate of around 4 percent between 2013, when sales were $39.5 billion, and 2017, when it will hit $45.5 billion. Lenovo estimates that revenues for density-optimized servers will grow at about 11 percent over that period, compared to around 4 percent for rack servers and around 3 percent for blade servers. IBM has done plenty of engineering to get dense and modular machines out the door in recent years, which allows Lenovo to hit the ground running. Significantly, Lenovo believes that China will account for around 20 percent of the X86 market in terms of shipments by 2017, and it has Sugon, Inspur, Dawning, and a number of other upstarts to contend with in its home market. Acquiring IBM's System x division vaults Lenovo over their heads and gives it the volumes to compete better against these companies, and the size of its PC business gives Lenovo a chance to use that leverage with Intel and AMD to get better deals on server components. That is the main reason why IBM should never have left the PC business, but having done so, perhaps its sale of the server business a decade later was inevitable. Cisco is demonstrating that you can build a server business without a PC business, but it is leveraging its relationships with the networking side of the datacenter to accomplish this, so the comparison to IBM or Lenovo is not precisely fair.

It is not clear exactly what IBM will do for customers who want X86 iron as part of their engagements for software and services. IBM is positioning its Power8 machines against X86 iron, and is working to open up that platform and partner with system designers and chip makers to get Power technology more broadly adopted. But this will take time, and it would have been better if IBM had done this a decade ago before the sales slump in the Unix market hit the Power Systems business so hard.

What is also not clear is how customers, both inside the US and European governments and outside in enterprises at large, will react to having their server supplier changed from IBM to Lenovo. IBM has committed to maintaining the System x iron for at least five years, and is being paid by Lenovo to do so under a contract provision of the deal, much as was done when Lenovo bought IBM's PC business nearly a decade ago. This may or may not be enough to calm whatever fears System x server buyers have. Time will tell.

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