IBM Lenovo said on Thursday that it would pay $2.3 billion for IBM’s low-end server business, which includes the x86 line.
Lenovo of China, already the world’s largest
maker of personal computers, has purchased from IBM one of the world’s
largest computer server businesses, for what seems like a rock-bottom
price. Lenovo gets market share in an area where it is a small player.
IBM is
shedding a business that was killing its profitability in higher-margin software and services.
Wish both sides luck.
What seems something like the proverbial
win-win deal is more likely a sign of how fast things are changing in
the trillion-dollar global technology industry. Businesses like PCs are
losing ground to mobile devices like smartphones, and the
once-formidable computer server is increasingly viewed as one more
commodity piece of globe-spanning cloud computing projects from a few
elite players.
“We need to get an inventor’s profit, not a
distributor’s profit,” said Steve Mills, senior vice president of
software and systems at IBM. “Our investment in research and development
is what makes IBM go. It’s hard to do that in markets that don’t give
you credit for the innovations you bring.”
It’s stark how quickly that margin fell away.
A year ago, IBM was talking about a sale of its server business to
Lenovo for what was reported at the time to be $6 billion. Today’s deal
for $2.3 billion kept for IBM some higher-value servers, like those that
perform complex data analytics. But according to Mr. Mills, it also
included agreements for IBM to buy from Lenovo some of the commodity, or
x86, servers for IBM’s growing cloud business.
Noah Berger for The New York Times Steve Mills, senior vice president of software and systems at IBM, in 2011.
About 7,500 IBM employees, including people
in sales, marketing and customer support, will also move to Lenovo as
part of the deal, Mr. Mills said. He also noted that IBM still spends $6
billion a year in research and development, from which it plans to
create higher-value businesses.
“The money has to go where the market goes:
Social, mobile, analytics, and security,” he said. “We’ve put a lot of
money there, tens of billions just buying analytics companies over the
past several years. You’ll still see us doing a lot of creative things
in hardware.”
For its part, Lenovo moves from near
invisibility in the server market to a crucial position. According to
Gartner, in the third quarter of 2013 Lenovo’s global server presence
was about 0.2 percent of the 2.4 million x86 servers shipped worldwide.
IBM had a 7.5 percent share. Hewlett-Packard was first, with a 26.8
percent share, and Dell came second, with a 19.6 percent share.
“Even in China, Lenovo has only a 10-percent
share,” said Errol Rasit, an analyst with Gartner. “IBM has 11 percent.
There isn’t much more efficiency Lenovo can put into the manufacture,
H.P. and Dell have already been about as efficient as possible. Lenovo
bought entrance into an extremely challenging market that is in
transition.”
Investors seem to think Lenovo’s jump into a
sizable share of the market will have an effect on pricing, however.
Soon after the announcement, the share prices of both Intel and AMD, the
two prime suppliers of x86 chips, fell.
To some degree, the counts of market share
and profitability become more difficult as cloud companies like Google
and Amazon Web Services design and contract their own highly engineered
systems. While these custom-built devices aren’t counted by analyst
firms, they may already represent a significant share of the world
market.
In effect, IBM may have sold off a business
increasingly dominated by the cloud companies with which it must also
compete as it builds out its own cloud. Last year IBM paid $2 billion
for a cloud company called Softlayer, and last week said it would
spend $1.2 billion just this year building out that business.
Mr. Mills defended his company’s chances.
“Softlayer operates at a cost point equal to Amazon,” he said. “I don’t
worry about the competitive issue.” Google, he noted, has agreed to use
sophisticated IBM chips in its computer centers. “We’ve had our eyes on
the issue for some time,” he said