By Charles King, Pund-IT, Inc. August 20, 2014
IBM announced and Lenovo confirmed that the Committee on Foreign Investment in the United States (CFIUS) has finished its review of IBM’s divestiture of its System x server business to Lenovo and cleared the way for the $2.3B deal to conclude.
According to IBM, the sale will allow it to “focus on system and software innovations that bring new kinds of value to IBM clients in areas such as cognitive computing, Big Data and cloud.” The company also said the sale to Lenovo will provide x86 (System x) customers clarity and confidence in having a strong partner going forward.
Lenovo noted that for both its System x and Motorola Mobility acquisitions, it continues to work through regulatory and business processes, and remains on track to close both deals by the end of the year.
CFIUS clearance green lights IBM’s sale of its x86 server business to Lenovo.
Corporate acquisitions are never easy, but some in the tech industry can be particularly difficult. That’s largely due to the competitive and strategic value that IT has come to hold over the past four decades. Technology isn’t just a shiny tool or toy—it often demarcates the difference between winning and losing in global markets and political arenas, and between living and dying on the world’s battlefields.
When rumors arose over a year ago that IBM was discussing the sale of its System x division to Lenovo, it caused quite a stir, at least symbolically. The news arrived as the U.S. continued to struggle with the aftereffects of the worst financial collapse since the Great Depression, that were complicated by businesses downsizing and offshoring worker positions in order to maintain or improve their profitability and competitive positions.
Added to that were two troubling issues with political overtones. First, China’s continuing rise as a world economic power was undercut by evidence that it was sponsoring or sanctioning cyber-espionage against businesses and government agencies in the U.S., Europe and elsewhere. In addition, though China’s leaders vocally refuted those claims, the events played into the hands of political leaders and groups that were critical of U.S. foreign policies and involvements generally and of the relationship with China in particular.
In other words, it’s tough to think of a more politically challenging time for a leading U.S. corporation to sell a major, homegrown asset to what is perceived to be a Chinese business (though Lenovo is actually a multi-national company). Not surprisingly, IBM competitors were also happy to sow liberal amounts of FUD (fear, uncertainty and doubt) in hopes of System x customers and partners defecting and thus crippling the deal before it was completed.
So where do things stand now?
To begin, the CFIUS clearance should answer virtually all of the security concerns triggered by the deal. The make-up of CFIUS (chaired by the U.S. Secretary of the Treasury and with members from 16 Federal departments and agencies, including Commerce, Defense, Homeland Security and State) ensures that it has the experience and depth to identify and flag significant problems. That their intensive 6+ month review discovered no issues of significant concern is itself a significant finding.
The next point to consider is what the deal portends for the principals. In the case of IBM, the company’s statement that the deal will allow it to “focus on system and software innovations” is shorthand for maximizing efforts around its own proprietary System z (mainframe) and Power Systems platforms. IBM is certainly no slouch when it comes to innovative x86-based servers and systems. In fact, System x solutions lead the way in high end (4-way and above) x86 server markets, along with associated memory-intensive applications and use cases.
But the continuing good news Intel-based servers have enjoyed over the past decade pained many in IBM’s other system groups. That was especially acute for those whose livelihoods depended on the traditional RISC/Unix markets that bore much of the brunt of growing Intel-based system sales. IBM’s Power Systems clearly leads that sector, but owning a market in decline is like driving a car with a serious gas leak; it may continue to move forward but there will be a reckoning.
The fact that x86-based systems generally drive lower profit margins also placed System x further out of the IBM mainstream. Given the company’s past history of selling off businesses it deemed “commodities” (including the PC/laptop group it sold to Lenovo in 2004), System x’s days were numbered. But along with providing over $2B in cash, the new deal should allow IBM to fully leverage the considerable assets in its Power and z portfolios and the unique qualities those platforms offer in emerging analytics, cloud and cognitive computing markets.
The deal also clearly benefits Lenovo, immediately vaulting the company into the third position in x86 servers from its trailing place among the “others” in most market tracking studies. More importantly, in a single strike, Lenovo will gain a complete enterprise-class server portfolio, including midrange to high-end tower, rack mount and enterprise systems, past and new generation blades (BladeCenter and Flex System), high performance computing solutions (iDataPlex and NeXtScale) and integrated/converged systems (PureFlex x86 solutions). Additionally, Lenovo is acquiring the Enterprise-X technologies (including the latest 6th generation solutions) that have helped make IBM a leading vendor in higher end systems, including in-memory solutions.
In other words, much as the 2004 acquisition of IBM’s ThinkPad line helped make Lenovo a serious player in enterprise mobile computing, so should IBM’s System x organization help the company gain near-immediate entry to some of world’s largest businesses. Some will scoff at that notion, and we might, also, if this new deal didn’t include a human element; the lion’s share of System x’s executives and employees moving to Lenovo. Most of these folks are longtime IBM employees who are deeply knowledgeable of the ways into corporate IT accounts. We also expect that many will arrive at Lenovo feeling that they have something to prove to their new employer.
This all sounds great, but are there any potential pitfalls? Absolutely. Often the biggest shock in acquisitions comes in melding disparate corporate cultures. But there’s a good reason for optimism here, since IBM and Lenovo went through this particular dance before in 2004. The two companies worked hard to reduce employee culture shock, and continued interacting after the deal was done. Similarly, this new deal includes elements that should ensure the companies will continue to closely collaborate.
The largest challenge may be how well Lenovo can adapt to becoming a major mover in enterprise data center solutions. Former System x executives and employees will be carrying most of the weight in that respect, but it will also require the folks in Lenovo’s home office to adapt.
Given their past ventures, success seems eminent. In fact, in the decade since it acquired IBM’s PC business, Lenovo moved from a distant third position to become the world’s leading PC vendor, a point that likely underscores some of the current fear- mongering among IBM and Lenovo’s competitors.
Whether Lenovo can achieve similar progress and success in the server business that it achieved in PCs and laptops is anyone’s guess, but it would be a mistake to undervalue the human and technological assets the company will gain from this deal with IBM. Big Blue will soon be behind System x but the future with Lenovo looks like blue skies ahead.
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