Thursday, January 23, 2014

Finally, Lenovo buys IBM’s x86 server business

By Bill Moran and Rich Ptak

The rumors were right, we weren’t; Lenovo is buying IBM's x86 business. At a briefing this morning (1/23) IBM and Lenovo executives described the terms of the deal. An article on today's Wall Street Journal website includes comments from the Lenovo CEO[1]. The deal won’t close until the end of this year. Some US regulatory requirements, that could potentially delay the deal, will have to be met. So far we haven't seen comments from the IBM CEO.

Let's examine some known consequences of the deal. First, keep in mind that there are unknown situations and events that might occur before as well as after the deal closes. We will deal with the known unknowns, and not speculate on unknown unknowns (thank you Donald Rumsfeld).

The groups affected by this deal are as follows: 1) the two companies both individually and together, 2) employees of both companies but mosty the IBM x86ers, 3) the IBM x86management team, 4) the customers of IBM x86, and 5) HP and Dell, the major x86 competitors.

Let's discuss the effects on IBM first. IBM gains $2.1 billion in cash that can be invested in high growth, high-margin areas such as the new Cloud data centers IBM is planning, or to Power, Pure Systems, Watson or the new design initiatives. IBM sheds a low margin, high-volume business. IBM gets a healthy chunk of Lenovo stock, presumably the $200M balance, to meet the reputed total of $2.3B.

IBM retains the Pure Systems brand, and it will continue to create integrated systems by sourcing items from Lenovo. We anticipate that Lenovo will supply components to IBM more competitively than IBM can get them today because of Lenovo's larger and presumably more efficient supply chain. All good for IBM.

For Lenovo, they will have to integrate IBM’s business and assets into their own business model and operations. There exist risks in any integration; however, given their success with IBM's PC business, we view the risk as low. They enter the data center in a big way with clearly enhanced stature as an international competitor versus both HP and Dell. Lenovo walks away a big winner.

The entire deal faces some potentially significant risk in the regulatory approval cycle. Congress is always a bit of a wild card; however, both companies have been down this road before. We believe they know how to manage the approval process and getting it past the key US government players. It's unlikely the deal will get killed; but there remains a chance that key provisions will change.

For the IBM employees involved in the deal, we think that they will welcome the new opportunity. Between rumors and layoffs, the working environment for IBM x86 employees had to be both uncertain and stressful. IBM has not been growing overall; we expect the x86ers will welcome the stability and opportunity with the new owner.

Adalio Sanchez is the key player in the x86 management team. This aggressive executive led IBM's UNIX group to profitable business success before becoming the x86 General Manager. He persuaded IBM to invest heavily in the x86 as he skillfully leveraged the technology to grow the business. Also critical will be his moves against key competitors HP and Dell, where his record is one of forceful, direct action. We suspect that will continue at Lenovo.

The move presents significant personal opportunity for Adalio, tempered with the risk of fitting into the Lenovo culture. Tempering the risk, Lenovo’s CEO pointed out that the company currently already has five Westerners of twelve board members. This should smooth the path for a dynamic executive like Sanchez.

Perhaps, the most important segment of the world that needs to be happy with the new Lenovo are the customers of IBM x86. We expect that Sanchez will visit all his key customers to reassure them about the service and support that they will get from Lenovo. Lenovo's excellent track record with the PC will help in this task. Lenovo has significant credibility in the international market. Adalio Sanchez, as a very savvy executive, knows the right words and actions that soothe anxious customers. We will watch with interest to see how customer reactions unfold over the rest of the year. We expect not many will feel compelled to switch to competitors.

The obvious big losers from a strengthened Lenovo are competitors, HP and Dell. Both companies were disciplined as they trail behind Lenovo in PC sales. Lenovo enters a new market segment with excellent technology and able to leverage its existing supply chain and x86 experience. They can easily be envisioned as a more dangerous competitor than IBM. Dell appears particularly vulnerable and weakened because of the turmoil involved in going private.

In summary, this deal looks to benefit everyone involved except the competitors. The relationship between IBM and Lenovo is strengthened. Both look to become stronger individually. The executive team of the new Lenovo business unit is proven, experienced and aggressive. We expect they will continue to build new business for Lenovo.