IBM, Lenovo and the $2.3bn question: Can they hit the jackpot twice?

IBM, Lenovo and the $2.3bn question: Can they hit the jackpot twice?

Summary: Both companies will be hoping that the $2.3bn deal for IBM's server business will deliver the same win-win result as the sale of its PC business.

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When considering IBM's $2.3bn sale of its server business to Lenovo, it's impossible not to draw parallels with its 2005 sale of its PC business to Lenovo. In fact, both companies will likely be hoping for the same happy outcome.

Back in 2005, selling its PC business got IBM out of a low-margin business, while Lenovo gained global scale and rapidly grew to be one of the top PC companies. This time around, IBM says goodbye to more of its hardware business, while Lenovo's servers and storage operation takes a big step up.

Certainly Lenovo will be hoping that it can inject some excitement back into the x86 server market, as Yang Yuanqing, Lenovo's chairman and CEO, said: "With the right strategy, great execution, continued innovation and a clear commitment to the x86 industry, we are confident that we can grow this business successfully for the long-term, just as we have done with our worldwide PC business."  

For IBM selling the server business is a chance to get rid of a large, but not especially core, business and focus on high-margin, high-potential areas such as cognitive computing and cloud. It recently announced plans to spend $1bn building up its Watson software business, and $1.2bn on datacenters for cloud computing — almost exactly what it will earn from selling its server business.

"Someone has to be in this business, and Lenovo has a lot to gain. Lenovo has been trying to grow its presence in the global market and an acquisition of this size of a well-known brand is going to be something that they can capitalise on, but it won't be without its challenges," said Gartner analyst Errol Rasit.

The deal takes place against a turbulent backdrop in the server market: increasingly, the organisations with the largest datacenters in the world, like Facebook and Google, have decided to bypass the big-brand server makers and either build server systems themselves or use third-party original design manufacturers (ODMs) — typically based out of Taiwan — to build cheaper systems with the unnecessary components (and costs) cut out.

This has locked the big-brand server makers out of a growing chunk of the market at a time when sales to enterprise customers have been tough thanks to the general economic climate. Meanwhile, technologies such as virtualisation have made servers vastly more efficient, further reducing the need for new spending.

"This market is in transition as the fashion in datacentre design that has come from companies like Facebook and Google is starting to influence the mainstream enterprise" said Gartner's Rasit.

On top of this, enterprises are over time likely to switch more and more of their workloads to the cloud, further reducing demand for big-brand servers. And while the leading server makers will try to compete with the ODMs, the server market is heading towards commoditisation.

Despite these trends, Rasit feels there's life left in the server market, as the growth in the number of consumer devices accessing cloud services, plus the emergent Internet of Things, will generate demand.

"At the end of the day, anything that transmits or creates data will have to be processed or analysed in order to extract the useful information. We are in a challenging market, but there is still plenty of opportunity for players within it," he said, but added: "I don't think we'll go back to seeing the levels of growth we saw in the early part of the last decade."

Further reading

Topics: Servers, Big Data, Cloud, Data Centers, Enterprise Software, Virtualization

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  • Burnt earth in America

    Does IBM betray America? Since it lost protagonism IBM in the end of last century, this looking for hopelessly to recover it, China direct and natural competitor in the international trade this receiving the help of IBM, Lenovo an outsider to the industry IT, today has been the main producer of PC's year 2013. IBM prefers to leave "burnt earth" to its American competitors as they are HP, Dell and other and take advantage of this situation with its tech private ownership.
    luis river
    • IBM is not a commodity vendor

      PC servers are a commodity and IBM is smart enough to they are not a commodity manufacturer. Like all commodities, there is little differentiation between brands, so they are forced to compete on price. Leveno is a commodity vendor, with a lower cost structure and low cost manufacturing.
      Gary Doan
  • No servers? What's the point?

    IBM's core is big iron. If they don't have x86 servers, then the only big iron they have left is mainframes. Mainframes do not provide steady, reliable income, and software-as-a-service is a crapshoot. If something goes wrong, IBM won't have anything to fall back upon.
    technojoe
    • IBM is a huge services provider; probably the biggest around,

      and the mainframes are just one part of what IBM provides.
      adornoe
  • I was worried for a second

    When the headline said "server business" I figured IBM's POWER-based servers were included in that. I'm happy to see that they're not.
    John L. Ries
    • The "POWER" systems are not making money for IBM either, so, they could

      be headed out the door too, if they don't start paying off soon. But, when it comes to the Power systems, there would be more than one company interested in acquiring that type of system and power.
      adornoe
  • Oh boy, Another 30,000 IBM US Jobs will hit the BRICS

    with this selloff. Just guessing on the number but it's in the 10s of thousands. Pretty soon IBM US will be an empty office in Armonk with a red dial telephone sitting on the floor in the middle of the room.
    Telexer
    • If a product or service is not providing profits, or enough profits, then

      it shouldn't exist for the mere function of providing jobs. Businesses are not "make work" projects, such as what a lot of government services are set up to be.
      adornoe