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

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.
Written by Steve Ranger, Global News Director on

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."

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