Lenovo Closes IBM Server Deal, Eyes Expansion
As it closes its deal to acquire IBM's System x X86 server business, Chinese computer giant Lenovo is setting an ambitious goal of $5 billion in server revenues in its first year despite what the company acknowledged is "some slowness" in the X86 market.
"We’re going to attack the marketplace," pledged Gerry Smith, executive vice president of the Lenovo Group. At the same time, Smith acknowledged in a conference call this week announcing the deal's closing that X86 server revenues have been "incremental" and "we do need to grow the marketplace."
The $2.1 billion deal had to clear international regulatory hurdles, including approval by the interagency Committee on Foreign Investment in the United States (CFIUS), the European Commission, and China's Ministry of Commerce. Chinese acquisitions of U.S. technology companies and their intellectual property are politically sensitive. IBM has been through the CFIUS process four times, Smith noted.
Hence, he and Lenovo CEO Yang Yuanqing bent over backwards stressing that the new Lenovo server business would be "a secure and reliable technology provider."
The deal also makes Lenovo the third-largest supplier in the roughly $42 billion X86 server market. For now, it is unclear where additional growth will come from, but Yang emphasized that Lenovo would seek to expand its global reach into the Asian and other emerging markets as it leverages an operations platform built up after acquiring IBM's PC business a decade ago.
Smith added that the deal expands Lenovo's presence in the enterprise where it will target mid- and high-level server markets. As with the Lenovo PC acquisition, Smith said the server acquisition includes IBM's X86 server intellectual property. IP transfers are among the touchiest issues when Chinese companies attempt to acquire U.S. businesses.
Under terms of the deal that closed on October 1, Lenovo acquires IBM's System x, BladeCenter and Flex Systems blade servers and switches, x86 Flex, NeXtScale, and iDataPlex servers, software and networking. IBM said it would retain its System z mainframes, Power Systems, Power-based Flex servers along with PureApplication and PureData appliances. Lenovo will supply IBM with the Flex System chassis and switches that are the foundation of the Pure appliances.
It is likely the company was required to retain those systems and related intellectual property to clear regulatory hurdles, although the company did not elaborate.
IBM also said Adalio Sanchez, who led IBM's X86 server business, would continue in that position as Lenovo's senior vice president of enterprise systems. Pressed during the conference call about the length of his current contract with IBM, Sanchez said only that he was "going to Lenovo."
As the transition to Lenovo begins in "most major markets," Lenovo said the transaction must still close in several other countries. That is expected by early 2015.
For Lenovo, the server acquisition provides entrée into the enterprise market while adding heft to its nascent cloud business. Given how crowded those markets are becoming, it's likely the Chinese computer giant will have to expand its server business by seeding emerging markets in Asia, Brazil and parts of Africa.
For now, Lenovo stressed that it would adhere to IBM's X86 product roadmap, including Flex and PureFlex servers.