Details of the long awaited transaction between Lenovo and IBM were announced on Friday January 24th. IBM has sold its low end server business for US$2.3 billion. This transaction represents approximately US$5B in revenue, and 7,500 employees, largely in the US and China.
This deal comes as no surprise to capioIT. It has been flagged by us for a couple of years as a necessary transaction, most recently. According to media reports in the NY Times, the price paid was much closer to what Lenovo wanted to pay, than what IBM wanted to sell for. Given the recent numbers from IBM, this is not a surprise.
In general (with the necessary quality of execution caveat), the deal is positive for both parties.
Lenovo can extract several key benefits
- Instant market relevance with a market share going from 2% to at least 10% in the market place
- As with the PC business it acquired from IBM, and made into the world’s largest it can now focus on growth and volume.
- Selling the x86 server products into the Chinese markets will be much easier for Lenovo than IBM. IBM has produced some disappointing numbers in China in recent quarter due to both internal execution issues as well as market perception. This will not be as much of a problem for Lenovo.
- Price of production can be expected to shift downwards as more inputs are obtained from China.
- The Chinese connection for Lenovo will be also incredibly important when it is doing business in China against the likes of HP and Dell.
- Increased scale and momentum for Lenovo. Lenovo is a contender in another market. This builds both its momentum and visibility. It can be seen alongside Huawei as the genuine global leaders from China in terms of IT capabilities.
- capioIT anticipates that the acquisition will help drive Lenovo to invest further in IT services business. It has come close to acquiring global IT services providers before, and it is expected that this deal will only accelerate these plans.
IBM has simple benefits
- It has executed on a long standing strategy of leaving low margin commoditized markets. This deal follows the sale of the CRM BPO business late in 2013, and of course the PC market.
- The focus on the comparatively higher margin growth markets aligned to traditional IBM areas (software, Mainframe, Services) is maintained.
- Smarter Commerce, Analytics, Cognitive computing and Cloud are all able to take more executive mindshare. Senior leaders have freed up time spent trying to work through the future of the x86 business and can spend time to tighten strategy and execution in other areas of the business.
Potential losers from the deal are also clear
- HP, Dell and other x86 providers will have a competitor who is fully committed to the space, and has a proven track record of growing share and revenue in a tough commoditized marketplace. This will be at a global level and of course China and other emerging markets.
- Raleigh – The city of Raleigh, North Carolina has been associated with IBM for over a generation. With the shift to Lenovo the dynamic has changed for the city again. It is inevitable that whilst operations will remain, jobs over the long term will be lost. The Research Triangle is an innovative city, so it will be well placed to fill the void.
The deal by IBM to sell the x86 server business to Lenovo surprised no-one. In fact the only surprise was the time that it took to get the deal finalized.
The deal is aligned to both organizations strategy, and if it is as successful as the PC deal, then both parties will be happy, and will achieve their objectives. Perhaps the only question that remains is what IBM will sell to Lenovo in the next five years!!!!
If you require further information, please contact Phil Hassey, Founder capioIT. capioIT is an advisory firm focused on helping organisations to understand emerging technology in emerging markets. Phil may be contacted by email or phone below,
+61 (0) 422 231 793