IBM, Lenovo Reach Terms on x86 Server Business

Looking to exit a commodity hardware business, IBM turned again to Lenovo.

The computer giants on Thursday said they'd reached a $2.3 billion deal for IBM's x86 server business, confirming reports from earlier this week that IBM and Lenovo were close to an agreement. Lenovo will pay about $2 billion in cash, with the balance consisting of Lenovo stock. The deal will face regulatory reviews before closing.

The arrangement echoes IBM's sale in 2005 of its PC manufacturing business to Lenovo, which has turned the acquisition into the world's largest PC business by shipments. That PC deal involved $1.25 billion in cash and an 18.9 percent equity stake in Lenovo for IBM, which Big Blue gradually sold down.

IBM, which just reported a double-digit year-over-year decline in x86 server sales in its most recent quarter, has been thought to want to get out of low-end server sales and was also rumored to be in talks with Dell about selling that part of the business.

"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 for IBM Software and Systems, in a statement. In explaining the deal, IBM pointed to its own recent investments of $1 billion in the new IBM Watson Group for cloud cognitive computing and a $1.2 billion expansion of its global cloud computing infrastructure.

Lenovo, meanwhile, is looking for ways to expand beyond the global PC business, a shrinking category over the last few years as tablets and smartphones have out-competed PCs for much consumer and substantial corporate spending. Lenovo also has a division for manufacturing tablets and handsets.

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

Lenovo will acquire IBM's System x, BladeCenter and Flex System blade servers and switches, x86-based Flex integrated systems, NeXtScale and iDataPlex servers. IBM will keep its System z mainframes, Power Systems, Storage Systems, Power-based Flex servers and appliances under the PureApplication and PureData brands.

Lenovo will assume customer service duties upon closing of the transaction and will gradually take over maintenance in a handover process from IBM. According to the companies, approximately 7,500 IBM employees around the world are expected to be offered jobs at Lenovo.

The companies also plan to enter a storage and software partnership. Lenovo is supposed to become a global OEM and reseller for IBM entry-level and midrange disk storage systems, tape storage systems, General Parallel File System software, the SmartCloud Entry offering and some system software.

As fits its now-sharper focus on software and services, IBM said it plans to continue to develop its Windows and Linux software portfolio for the x86 platform.

Posted by Scott Bekker on January 23, 2014