Analysis, Business, Cloud Computing, Enterprise

Lenovo Will Be Getting a Deal on IBM’s x86 Server Division

Lenovo (HKG: 0992) announced in a press release Monday that it expects its deal with IBM (NYSE: IBM) for the company’s x86 server business to close on October 1 after receiving approval from US, EU and Chinese regulators.

The deal between the two companies is worth approximately $2.1 billion, with $1.8 billion being paid in cash and the remainder to be paid in stock. The original purchase price for the division, when the deal was first announced earlier this year, was $2.3 billion.

IBM will continue to maintain its Power-based servers. Lenovo will acquiring IBM’s System x, BladeCenter and Flex System blade servers and switches. The server business will retain the same branding — much like what happened when Lenovo obtained IBM’s notebook business — and will be managed by Lenovo’s Enterprise Business Group. According to a press release the x86 server team will continue to be led by former IBM executive Adalio Sanchez.

For Lenovo, the world’s largest PC maker by market share (IDC reports it at 19.6%), the x86 server business is a lucrative albeit competitive market. The company has purchased the world’s second-largest server vendor (at 23.6%), but this comes at a time when interest in ARM architecture for servers may galvanize the low-end x86 for Lenovo.

A fresh take on China

IBM’s server business, while facing fierce competition from rivals, is still a strong brand. Lenovo can do something with it that IBM could not: Sinicization.

While IBM has cadres of loyal servers customers in China, geo-politics sometimes got in its way. Over the past two years the Chinese market has become progressively more hostile to US technology companies. For IBM in particular, this came in the form of the Chinese government encouraging banks to drop IBM’s servers  in their data centers in favour of domestic alternatives. There were no reports of banks actually complying with this request, as for mission critical applications they need solutions that are tried and true, but it shows the hostility of the market to the company — in its US form.

The $2.1 billion the deal is being signed for is about $200 million less than when it was originally announced. This is due to a change in the value of inventory being transferred between the two companies. While the two firms won’t say much more than just that, this decline in inventory value could be because of a Chinese market that’s becoming increasingly hostile to IBM’s server products.

Having the division acquired by Lenovo means that these challenges will simply dissipate. IBM’s x86 server division is now, effectively, Chinese.

This, alternatively, might present its own problems when trying to sell servers to US-based customers. Chinese telco equipment provider Huawei has been the victim of a vicious attack in the US and many other Western countries for its alleged ties to China’s military and intelligence apparatus, though the evidence for this remains inconclusive — and points more towards a lobbying campaign by its US competitors.

The transaction between the two companies will close Wednesday in China, the US and EU then will be finalized in most other major markets by year’s end.