IBM cuts bait on Intel server line, Lenovo bites

Ed Scannell, Senior Executive Editor

Just days after reporting dismal server hardware sales, IBM has unloaded its lower-end Intel-based System X servers to Lenovo for $2.3 billion.

Reports of this deal began to circulate last July with speculation mounting in recent weeks following the company's launch of its X6 architecture for its System X and Power servers, which industry watchers saw as an attempt to make its Intel Corp. servers more attractive to potential buyers.

Some analysts believe the deal makes strategic sense for Lenovo, IBM and the respective users of each company.

"Lenovo will be invested in growing the business, users consequently will get lower price points and a clearer and more defined product roadmap," said Krista Macomber, hardware analyst with Technology Business Research, Inc., market researchers in Hampton, N.H. "But they will also get the service and support they are used to getting from IBM."

The deal should open up new market opportunities for the System X line and IBM's higher-end Power series as well, according to Macomber. With the System X line gone, the Power series can pursue new market opportunities without "stepping on the toes" of System X, Macomber said.

Initially, some users may be unhappy with the deal and could jump ship.

"There could be some dissent among the more diehard System X customers over the next year or so who could be concerned about support, but overall the defections will be relatively light," Macomber said.

Besides the System X servers, other IBM server products in the acquisition include the company's BladeCenter and Flex System blade servers and switches, x86-based Flex integrated systems, NeXtScale and iDataPlex servers, and the blade networking and maintenance operations, according to a company spokesman.

IBM will retain its System z mainframes and Power Systems, both of which had disappointing sales results for 2013, along with its Storage Systems, Power-based Flex servers, and PureApplication and PureData appliances, according to the company.

As part of the deal IBM and Lenovo will form a partnership that involves a worldwide OEM and reseller agreement for a range of IBM products including Big Blue's Storwize disk storage systems.

"This divestiture allows IBM to focus on system and software innovations including cognitive computing, big data and cloud," said Steve Mills, IBM's senior vice president and group executive, IBM Software and Systems, in a prepared statement.

Earlier this week IBM reported overall server hardware sales for the fourth quarter plummeted 26%, with the System X series dropping 16%.

For its part of the deal, Lenovo will assume all related customer service and maintenance operations for System X products. IBM will provide maintenance delivery on Lenovo's behalf for an undisclosed period of time, according to a company spokesman.

The deal builds on the collaboration between the two companies, which began in 2005 when Lenovo bought IBM's desktop PC business, including the ThinkPad laptops.

Under the terms of the deal Lenovo will fork over $2 billion in cash with the remainder in stock. A company spokesman said some 7,500 IBM workers will be offered positions at Lenovo.

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