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The lowdown on Lenovo’s acquisition of IBM’s x86 business

Servers, Storage and Networking | Posted on October 7, 2014 by Emily A. Davidson

 

On October 1 2014, IBM and Lenovo closed Lenovo’s acquisition of IBM’s x86 server business. I talked with our dedicated IBM team and got the lowdown how much it costs, why they did it, and what happens next.


The low down on Lenovo’s acquisition of IBM’s x86 business
The estimated purchase price is approximately US$2.1 billion. US$1.8 billion will be paid at close in cash after estimated adjustments and US$278 million in Lenovo stock, based on the closing prices of Lenovo’s stock price on September 29, 2014.

The deal lifts Lenovo from number six in the world to number three with approximately 14% market share. These products support Lenovo’s overall financial performance and strengthen its core PC business.

Who the Lenovo deal affects
Approximately 6,500 IBM employees in more than 60 countries are expected to transfer to Lenovo at the close of the transaction. These include product development, manufacturing, sales and marketing, and staff employees in locations such as Shanghai and Shenzhen, China, and Taipei, Taiwan; Austin, Texas; Raleigh, North Carolina; and Rochester, Minnesota.

IBM also makes x86 servers via contract manufacturers in Sao Paulo, Brazil; Szekesfehervar, Hungary; and Guadalajara, Mexico, and those contracts have also been assigned to Lenovo as part of the deal.

What Lenovo gets with the acquisition of x86
Lenovo will acquire IBM’s entire industry standard x86 server portfolio including:

  • All of IBM’s x86 server product lines including towers, racks, high-density and blades
  • IBM Systems Networking portfolio assets including embedded, top-of-rack switches and software
  • A highly-skilled x86 sales force, key labs and other facilities supporting these products

All relevant intellectual property (IP) will be exchanged with the business in this transaction – yes, this means the appropriate patents as well.

Why Lenovo did it
The expansion of its existing x86 hardware business accelerates Lenovo’s move up the industry’s value chain and enhances the overall success of its PC+ business. This move to drive profitability in Lenovo’s core commercial business not only provides a significant profit pool but it also directly fuels their ability to invest in high-growth PC+ businesses (including tablets, smartphones and smart TVs). This is a very clear fit with Lenovo’s strategy.

Why IBM did it
In a rare interview with Timothy Pickett Morgan for Enterprise Tech, Adalio Sanches, General Manager of IBM’s System x Division states,

[IBM]…is very good at looking at inflection points in the marketplace and looking at how do we continue to evolve. And when you look at the overall x86 server space, a lot is changing with the advent of cloud and so forth. IBM will continue development the enterprise systems with very strong backs as well as to continue to participate in the x86 space by way of clouds through the SoftLayer acquisition. When you look at the x86 space, as you know we have been a leader in innovating, as evidenced with what we did with PureSystems and more recently two weeks ago with the System X6. But there is a dynamic in the marketplace that in order to be competitive, it is getting to be more and more challenging and you need more scale and you need more flexibility. The huge scale and capacity and flexibility that Lenovo can bring can really make this business the best that it can be.

Why you should care
If you’re an IBM or Lenovo client, it’s important to know that Lenovo’s ThinkServer and IBM’s x86 server portfolios complement each other. Lenovo’s portfolio is primarily focused on small and medium businesses, while IBM’s portfolio is focused on large enterprise and data center customers. The companies’ customer bases are complementary as well, and both current and future customers will have access to the business partner they need with a broad portfolio of products and services.

Should you stay with Lenovo? You should consider that Lenovo’s growth strategy also includes the acquisition of Motorola Mobility. While the close timing is coincidental, both investments provide Lenovo with exceptional talent, a global footprint and a competitive edge in the marketplace. Lenovo states,

“We are comfortable with the risk and highly confident in our ability to execute based on our M&A track record over the past decade. Lenovo has successfully acquired and integrated four businesses since 2005, while also starting up three joint ventures. We have an excellent track record in M&A integration, and in fact, we believe this is one of our core competencies.”

Today, Lenovo has over $US5 billion in cash on its balance sheet and sufficient credit lines in place. The IBM team at Softchoice believes the balance sheet and other disclosures demonstrate to clients that Lenovo has the resources in place to finance both acquisitions, cover integration costs and sustain the broader business going forward.

What happens next…
You are still able to purchase IBM x86 products from Softchoice and get support from our dedicated IBM Technical Architects and PreSales Specialists. Lenovo will be sending badged IBM technicians onsite to support x86 products for the next 5 years. Lenovo will continue to use the IBM brand on System x products for about a year. They have not made any branding decisions yet for System x products beyond that.

What you should do right now – send us your questions!
At Softchoice, this means a few of our dedicated IBM server team members have shifted to Lenovo, but nothing else has changed (they still sit in the same desks!). Our clients have come to us with A LOT of questions like what does this mean for my existing investment? Who do I call for support? How does this affect upcoming projects? So we put together this webinar.

IBM Lenovo Acquisition webinar

You will be able to submit questions ahead of time! So register today!

 

 

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