Why IBM is selling its server business to Lenovo

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The world’s largest PC maker, Chinese tech company Lenovo (OTC: LNVGY), will pay $ 2 billion in cash and $ 300 million in shares to acquire IBM‘s (NYSE: IBM) low-end x86 server company, also known as System X.

This is not the first time that Lenovo has acquired a business unit from Big Blue. In 2005, the company acquired the ThinkPad line of PCs from IBM. The company ended up becoming the biggest player in the PC arena. The contraction of the PC industry has not prevented Lenovo from establishing a profitable PC business, thanks to economies of scale and high quality standards in manufacturing. Lenovo posted a 36% increase in profits last November, but Lenovo wants more. It aims to conquer the smartphone space, and now, the low-end server market.

IBM wins
Overall, the latest acquisition appears to be a win-win situation for Lenovo and IBM. Big Blue’s low-end server business has been declining for some time, hurting the company’s bottom line. This move also significantly reduces IBM’s dependence on hardware. This is exactly what the company wants. Big Blue’s new business priorities in its 2015 roadmap are cloud computing, Smarter Planet, business analysis and growing markets. Additionally, between 2010 and 2013, the company spent around $ 12 billion on acquisitions, mostly buying software companies in the cloud space.

There will always be a place for the material
Note that while IBM’s emphasis is on software these days, the company is not completely withdrawing from the server world. It plans to stay in the high-end server and mainframe industry, focusing on its System Z and Power lines, as well as its storage systems.

In other words, Big Blue is essentially selling the low margin, high volume segment. This is consistent with IBM’s new strategy, which focuses on high-margin software sales and uses mainframe and System Z technologies as a way to sell recurring services and profitable support contracts.

In addition to getting $ 2 billion in cash, IBM will have permission to continue selling System X servers as a Lenovo reseller partner. Unlike System Z, which are mainframe servers for large enterprises, IBM’s portfolio of System X servers were primarily aimed at mid-sized businesses, hosting companies, and customers with small cloud needs.

Lenovo wins, Hewlett-Packard loses
Recent acquisition puts Lenovo in a better position to compete Hewlett Packard (NYSE: HPQ) and Dell in the server market.

Hewlett-Packard will now face a rival unafraid of aggressive pricing to capture market share. In the third quarter of last year, Hewlett-Packard had the largest share of the $ 9.5 billion low-end server market, according to IDC.

That could change drastically in the coming quarters as the latest acquisition is expected to take Lenovo five years forward on its server expansion plan, raising its global vendor rank from No.6 to No.3, according to Peter Hortensius, senior vice president at Lenovo.

Last takeaway
The acquisition of IBM’s low-end server business by Lenovo could be a win-win situation. IBM, which last week reported its seventh straight quarter of declining revenues, is trying to reinvent itself once again by focusing on high-growth areas, such as cloud computing and software.

The deal will also give Lenovo around 12% of the global server market. Although the acquired business unit is barely profitable, by increasing the sales volume, Lenovo could turn IBM’s low-end server unit into a cash-flow machine, as the company is well known to use a aggressive pricing strategy combined with high quality quality control. to successfully conquer market share.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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