Lenovo Agrees to Buy IBM Server Business for $2.3 Billion

http://dealbook.nytimes.com/2014/01/23/lenovo-buys-ibm-server-business-for-2-3-billion/

by rickdale • 13 years ago

258 202 13 years ago

dealbook.nytimes.com

porlw• 13 years ago

Note, only their low-end x86 business, not the POWER servers.

cones688• 13 years ago

Or even more profitable MainFrame (Z Series) which is still growing

afhsfsfdsss882• 13 years ago

..which is terrific hardware to be sure.

But you have to be in Al-Qaeda to be able to afford it.

Shivetya• 13 years ago

Z for mainframe, I for iSeries (think AS/400 - but now these machines are huge), and P for AIX.

the installed number of those three is immense and in many organizations most people would never suspect.

scholia3• 13 years ago

From IBM's latest financial results: http://www-03.ibm.com/press/us/en/pressrelease/43008.wss

Revenues from the Systems and Technology segment totaled $4.3 billion for the quarter, down 26 percent from the fourth quarter of 2012. Systems and Technology pre-tax income was $0.2 billion, a decrease of $768 million.

Total systems revenues decreased 25 percent. Revenues from System z mainframe server products decreased 37 percent compared with the year-ago period. Total delivery of System z computing power, as measured in MIPS (millions of instructions per second), decreased 26 percent versus the prior year. Revenues from Power Systems decreased 31 percent compared with the 2012 period. Revenues from System x decreased 16 percent. Revenues from System Storage decreased 13 percent. Revenues from Microelectronics OEM decreased 33 percent.

fidotron• 13 years ago

Indeed, though that could very well be that no one else wants to buy it as much as IBM not wanting to sell it. POWER as an architecture seems to have thoroughly lost momentum everywhere except at IBM themselves (the console market dropped it, what remains of PA Semi do ARM based designs in Apple), which is a bad sign. MIPS and SPARC were both here before.

nitrogen• 13 years ago

POWER still has life in embedded/SoC applications and IBM's mainframes, I'm sure. There are CPUs in places you'd never think existed.

seabrookmx• 13 years ago

The Wii U still uses a PPC based chip.

I agree though that's it is a dying architecture and it would surprise me if even Nintendo bothered to use it for their next generation (especially since Dolphin has clearly demonstrated that emulating these PPC chips is viable for backwards compatibility).

chrisgd2• 13 years ago

But not in time for IBM to include the one-time gain to offset the one-time losses in the earnings report this week.

iends7• 13 years ago

Surely the deal could have been announced earlier in the week, if they wanted it to. Some other reason caused them to wait to announce it.

gtirloni2• 13 years ago

They are saving it for the next quarters.

They will run out of things to sell soon enough, IMHO.

chrisgd2• 13 years ago

You can announce it whenever, but it needed to close within their quarter to be included.

midas007• 13 years ago

So the bazillion dollar question is: when will there be more open source hardware in commodifying desktop and low-end servers businesses?

matthewmacleod• 13 years ago

Fascinating that IBM's entire lower-end server business is worth about two thirds of Snapchat.

n1ghtmare_• 13 years ago

I came here to say exactly that. It's absolutely crazy.

rplnt• 13 years ago

The value is probably closer to reality. Don't know what is Snapchat really, but other hip online whatever (instagram, tumblr, facebook, ...) are insanely overvalued for some weird reason.

herge• 13 years ago

Eh, Snapchat is worth more than half of Sun Microsystems.

coliveira• 13 years ago

That's because social websites are in the business of taking money from speculators and unsuspecting investors. The valuation doesn't represent their revenue-producing capacity, just the fact that they can be traded by speculators for the (remote) possibility of becoming the next Facebook.

loceng2• 13 years ago

Well, in part though these social networks can theoretically be worth the amounts they state - that is if they're not factoring competition and that users are mobile and can easily start using another service very quickly. This is why governance of the ecosystem is the next competitive advantage layer.

chaz3• 13 years ago

LINE, a free messaging app in Japan, made $194m in a single quarter, and its high margin business continues to grow fast. It's monetized through virtual goods and partnerships. And yet, it's nearly unheard of in the US.

I'm not sure if SnapChat is a winner and if their multi-billion dollar valuation is correct, but there's there's still whitespace in the market and plenty of money to be made.

http://www.techinasia.com/line-app-financials-q3-2013-sees-r...

Keyframe• 13 years ago

The question is what is the longer term stability and volatility of that value? In both cases. Also, how much of that value is perceived and how much is calculated.

nly2• 13 years ago

Valued, not worth.

loceng2• 13 years ago

It's hard to make copies of users, not so hard to copy hardware.

johnward5• 13 years ago

Not to mention that the server business brings in $5 billion in actual real revenue yet is being sold for 1/2.

mnglkhn22• 13 years ago

Revenue matters, but the valuation is driven by the amount of profit. Margin in the server business must be very low (5%) and hence the valuation is a multiple of profit and not revenue.

tomasien4• 13 years ago

Snapchat is better than IBM's entire lower-end server business. I know this is not a popular opinion, but I think what Snapchat has done is spectacular and what IBM has done is pretty meh.

iends7• 13 years ago

Do you have particular insights into IBM's low end server business or is it because you use snapchat and have never used an IBM server?

ixmatus• 13 years ago

I'm not immersed in either business but I think you're making your argument too black-and-white. Snapchat is doing something valuable (I don't exactly know what) but I do not think it's better than what IBM is doing, IBM has been a powerful innovator in the computing industry for a long time and there's a lot of infrastructure powered by IBM's technology, even indirectly. I'm sure Snapchat is indirectly influenced by IBM - so writing either one off as better or worse is silly I think.

Different? Definitely. Providing value in totally different but important wasy? I'm sure. Again, I don't know either business in or out so these are more musings than battle-won opinions.

lsc4• 13 years ago

To be fair, the lower-end of IBM's server business is much like dell; they don't actually manufacture any of the complex bits, they just sell them. Your CPU is made my intel, your ram by Samsung and your raid chipset by LSI, just like if you bought a SuperMicro; In fact, it wouldn't surprise me at all if SuperMicro did more of the board layout work in-house than IBM or dell.

That said, the IBM has... much more market share than I thought in the server market[1] so even if it's mostly a sales game, it's not a small sales game.

[1]http://www.forbes.com/sites/chuckjones/2013/08/29/ibm-regain...

nulagrithom• 13 years ago

"IBM's System z mainframe running z/OS experienced its third consecutive quarter of growth, increasing revenue 9.9% year over year to $1.2 billion, representing 9.8% of all server revenue in 2Q13."[0]

IBM makes some big systems. To me, it's not terribly surprising they'd be willing to part with their lower-end units. Mainframes are where the money is for IBM.

[0]http://www.idc.com/getdoc.jsp?containerId=prUS24285213

michaelt2• 13 years ago

I certainly agree that Snapchat is over-valued.

The problem with being in a mature market is you can't convince investors that huge growth is just around the corner, so they start looking at things like 'profit' and 'dividends'.

And when you have HP and Compaq and Dell producing basically the same thing, you can't charge much of a premium as your customers can easily switch suppliers.

testrun• 13 years ago

Compaq does not exist anymore.

patmcguire• 13 years ago

Same as Tesla being worth one and a half Chryslers.

matznerd• 13 years ago

Tesla definitely has more potential upside than Chrysler.

bitcuration• 13 years ago

Consider IBM is lucky to fool Lenovo into it. It puzzles me what's in the world has Lenovo been thinking to spend that much money on that. Different from thinkpad, x86 server business is already doomed. Might Lenovo see a private data center future than public cloud dominance?

oijaf8882• 13 years ago

How is the x86 server business doomed? Do you think there will be an abrupt shift to ARM servers?

ChuckMcM3• 13 years ago

I realize there is a bit of snark in that comment but the interesting bit is known as COGS. Part of the "value" of a business is the rate at which it can make money, and the server business is limited in its rate by how many machines you can build and the price you can sell them for. Most internet businesses (like Snapchat) are limited only by the amount of money you can extract from users and the number of users you can sign up. While the sunk costs of hosting servers and infrastructure is non-zero, the marginal cost of an additional customer is tiny compared to the marginal revenue they could generate.

This is the fundamental way in which the information economy is different than the goods economy. And that makes comparing a business in one, with a business in the other, invalid.

nacs3• 13 years ago

And just how much money is Snapchat extracting from its users to justify 3 billion?

cwp2• 13 years ago

Not only that, but nobody forked over billions for Snapchat. The company took investment at a price that suggests we can extrapolate a total valuation in the billions, but nothing like that amount of money has actually changed hands. Lenovo is putting up $2 billion in cash for this deal.

dave_sullivan• 13 years ago

I thought Marc Andreessen's take was pretty plausible:

"""The bull case on Snapchat is that there's a company in China called Tencent that's worth $100 billion.

And Tencent is worth $100 billion because it takes its messaging services on a smartphone and then wraps them in a wide range of services—things like gaming and social networking and emojis, and video chat—and then charges for all these add-on services.

And it has been one of the most successful technology companies of all time and is worth literally $100 billion on the Hong Kong Stock Exchange.

Maybe that's [CEO Evan Spiegel's ] plan. Maybe Evan's plan is to transplant the Tencent business model into the U.S., which nobody has actually been able to do yet."""

IBM is already IBM, and they're in a market with diminishing margins. Snapchat... Who knows?

mariusz79• 13 years ago

Is that because 2.3B was not enough to buy Nest? :)

afhsfsfdsss882• 13 years ago

International [used to make]Business Machines

psaintla• 13 years ago

They should just be International Patenting Machine

bigdubs• 13 years ago

International Consulting Machine

mtgx• 13 years ago

I'll repost my comment from TheVerge:

It just boggles my mind that a decade and a half after Innovator’s Dilemma and Innovator’s Solution came out, which I’m sure every CEO has read so far, there are still so many companies that repeat every damn mistake in the book. Heck, IBM is actually given as prime example for why big companies fail, with their past failure in the micro-computer market.

I mean look how crazy this is. IBM sells the server business because it’s “not profitable for them”:

“It’s underperforming because of the cost of doing business on IBM’s side,” he said.

But on the other hand, Lenovo wants it because they consider it a profitable business:

“Low-cost servers are the fastest-growing, most attractive area of the server business right now, so this would make sense,”

http://www.bloomberg.com/news/2013-04-18/ibm-said-to-be-in-t...

This was written to the letter in Innovator’s Dilemma – a decade and a half ago – and yet IBM still failed to see it coming. Some companies just deserve to burn. There’s no excuse.

Companies getting disrupted need to adjust their cost structures, if not they need to create entirely new business spin-offs that can act as independent businesses. This was discussed in Innovator's Solution. It would've given them the ability to actually make money off of this "fast growing sector" like Lenovo calls it. But because of their current cost structures, they can't do it now.

They are now moving up-market to software and services, and letting Lenovo, a down(er)-market player take this business away from them. What do they think will happen in 5-10 years? Lenovo (or some other PC player/new server player, currently) will move up-market yet again, and do what IBM does cheaper, while still being very profitable, while IBM will be forced to sell that business, too. The solution to disruption isn't to run away (at least not in the long-term).

This will happen to Intel, too, within 2-3 years. Right now, Intel makes 70 percent of its revenue from ~$200 chips in the PC market. In 2, maybe 3 years at most, that business will be completely commoditized, as ARM chips reach similar performance levels at much low cost.

Intel has tried, with little success, to enter the mobile market, but right now they aren't making any money, and are in fact losing money with Atom chips, especially since they're paying OEMs to buy their chips [1] (anti-competitive? You tell me).

Trying to succeed with Atom is sort of the right solution, but if they aren't going to make money with their own cost structures, then it's going to fail. Trying to succeed with Core chips by lowering power consumption is a losing proposition because those chips are much more expensive.

[1] http://www.computerworld.com/s/article/9245530/How_Intel_is_...

smackfu2• 13 years ago

One company wants 50% profit margins, and the other is okay with 20%. The same business may be great for one and something that is dragging down the other.

dagw3• 13 years ago

I imagine that when you are already making Intel based laptops and workstation, adding low end Intel based servers to your production line has a lower marginal cost than it would for a company that only makes Intel servers.

smackfu2• 13 years ago

Too late to edit, but to give numbers, Lenovo had gross margin of 13% last quarter. IBM had 48%.

redial• 13 years ago

The problem is that they are selling the business instead of adjusting it's structure to bring it inline with the levels of profits they are confortable with.

The profits fell over the years because of 'disruptors', IBM could't accept the losses so they decided to sell. It happened 10 years ago in the PC, now it's happening with low end servers, maybe in 10 years high end servers are not going to be profitable for IBM any more and they are going to get rid of them.

nly2• 13 years ago

If ARM are going to be a long-term threat to Intels $200/chip market, would AMD not be the canary in the mine? Or does moving out of the fab business like AMD make that not-so?

lmm• 13 years ago

Are people still buying AMD processors? My impression was that they really had collapsed over the last 2-3 years.

(Not that I believe ARM will win; x86 still has a huge compatibility advantage, and phone batteries get bigger every year)

jotm• 13 years ago

I always thought Intel's revenue is mostly from enterprise equipment (including Xeon processors)?

iends7• 13 years ago

I don't think you have a good understand of IBM's business.

IBM is divesting its low margin hardware business. Currently, IBM's gross profit margin is 51% driven mainly by software sales, services, and global finance. IBM wants to jettison lower margin business units (margins have been falling in hardware for years, it's a race to the bottom) and instead focus resources on the more profitable business units.

"They are now moving up-market to software and services..."

IBM is not moving up-market, they've been "up market" for many many years. Low margin hardware revenue has been quite behind software and services for many years. IBM has not failed to see it, instead, this is a move anybody paying attention has known was coming for years.

bigchewy• 13 years ago

I don't think you have a good understanding of the Innovator's Dilemma. The research shows very clearly that companies like Lenovo will continue to eat away at IBM's lowest margin business, whatever it is, until IBM is gone has nowhere to go.

Look at the steel mills. They did the same exact thing IBM is doing now. Everyone applauded the massive steel mills the way that you are applauding IBM. And 100% of those mills are now out of business

jbb555• 13 years ago

"as ARM chips reach similar performance levels at much low cost."

This won't happen.

sigil• 13 years ago

Heck, IBM is actually given as prime example for why big companies fail, with their past failure in the micro-computer market.

Actually, IBM's PC business was one of the few case studies in "Innovator's Dilemma" where the big incumbent got it right. [1] They spun off an autonomous division to create the PC, and put as much distance between it and the existing org as they could -- both physically (down in Florida, with IBM HQ in New York) and organizationally.

Not to malign your overall point though. I agree, not only does the IBM of today fail to engage in offensive product disruption like the PC, they don't even seem interested in defending against disruption anymore. Their strategy with the Thinkpad line, and now their x86 servers, seems to be to sell before the disruption fully kicks in and there's nothing left.

Defending against disruption is really expensive, maybe that's the lesson here.

[1] http://books.google.com/books?id=SIexi_qgq2gC&lpg=PA43&ots=A...

vl2• 13 years ago

This will happen to Intel, too, within 2-3 years. ...In 2, maybe 3 years at most, that business will be completely commoditized, as ARM chips reach similar performance levels at much low cost.

Intel continues to be leader in tech process, always being a generation ahead of competition. While they can sustain this advantage, they will produce better laptop/desktop/server CPUs in terms of power efficiency.

kitd• 13 years ago

They are now moving up-market to software and services, and letting Lenovo, a down(er)-market player take this business away from them.

This suits IBM fine, and they have been doing this for the past decade. They would prefer to focus on solving high-margin business intelligence and integration problems for customers. Any h/w business they retain is the more specialist stuff in support of that.

IBM's big interests in the future are smart data analytics and the IoT. Expect to see everything they do geared towards that.

NB: I'm an IBMer but all opinions are mine.

lispm2• 13 years ago

The US continues to puzzle me.

China is seen as aggressor in Cyberwar, Chinese hard- and software is accused of having security problems, there are lots of discussions about the more aggressive role of China in Asia, the US has a huge trade deficit with China, China is accused of spying, ...

But the US continues to sell its companies and its business to China and imports stuff from there more and more.

Does the US have an idea what to do to balance the relationship - besides sending the Navy or let bomber airplanes fly over disputed areas?

http://www.reuters.com/article/2013/11/27/us-china-defense-u...

Note the US government needs to approve such deals:

http://www.bloomberg.com/news/2013-02-14/make-it-easier-for-...

sargun• 13 years ago

US companies operate as individual entities. Our government doesn't have end-to-end control over commerce.

lispm2• 13 years ago

The US government needs to approve such deals.

sidko• 13 years ago

IBM is a private company, it isn't owned by the US Government.

dredmorbius• 13 years ago

US government is one heck of a big customer of IBM though.

Not sure how much in the low-end server market, but still.

dagw3• 13 years ago

"The US" isn't selling anything as "The US" owns relatively few companies. An international conglomerate, with headquartered in the US, is selling of a small part of its business. It isn't up to IBM to unilaterally act against its own business interest to try to uphold US security policy.

rayiner5• 13 years ago

What's irritating to me is that many of the people who claim to be pro-national security and defense cheerlead the whole process of outsourcing our sovereignty piecemeal to China.

Gracana• 13 years ago

They do?

scott_karana2• 13 years ago

IBM is sovereign to America?

ams61104• 13 years ago

Guessing the servers in question (X86) were already manufactured in China anyway.

eitally• 13 years ago

When we (Sanmina) owned the manufacturing contract for X-series servers we built them in Mexico and Hungary. When we sold the manufacturing contract for IBM PCs (Netvista), laptops (Thinkpads), and X-series servers to Foxconn & Lenovo in 2008, Lenovo was manufacturing in Mexico & China and Foxconn in Hungary (and probably elsewhere). No one has built any PCs or servers in the US since IBM essentially divested themselves of their huge presence in Research Triangle Park. Dell used to manufacture PCs in the US but moved the last of their stuff overseas in 2010. I'm not sure if there is any HP manufacturing in the US, but I suspect not. Dell, HP, Foxconn, Lenovo, Flextronics, and Sanmina all have a large presence in Jalisco, MX, in and around Guadalajara. ... and in/around Shenzhen, Bangkok, Shanghai, Singapore, ....

kyrra• 13 years ago

The US government will stop deals that they see as "bad" for them. See the canceled buyout of Sourcefire by Checkpoint back in 2006[0][1]. Though, Sourcefire was recently bought by Cisco.

[0] http://www.securityfocus.com/news/11382

[1] http://blogs.computerworld.com/node/1913

wcchandler• 13 years ago

Here's the press release which gives a bit more information: http://www-03.ibm.com/press/us/en/pressrelease/43016.wss

chiph• 13 years ago

They were dumb to get rid of the "Netfinity" branding. And even dumber to sell the division. $20 EPS, here we come!

johnward5• 13 years ago

Well the article mentioned 7,500 employees so that has to be close to the billion dollar range for salary/benefit reduction. So that is one way to go after $20 eps...

balozi• 13 years ago

IBM still has their usual business of building questionable enterprise applications to fall back on. That or continue building $200-million supercomputers for the NSA. Eh...Sorry, I meant Department of Energy.

Grue3• 13 years ago

What does IBM even do these days? It's like Nokia selling their mobile phone division to Microsoft.

johnward5• 13 years ago

IBM does enterprise software and professional services. It's much more profitable than low end hardware. They are one of the largest software companies in the world. A lot of consumers just don't get as much exposure to the brand to realize how big it is. If you've ever worked in the corporate world you would know.

jzwinck3• 13 years ago

I have worked in the corporate world for a decade, and the only things I have seen IBM used for were servers (x86 and Z Series). Not once has someone said, hey let's get some software from IBM. Now we'll get our servers from Lenovo. I hope their excellent industrial design doesn't suffer (as it did a bit in the ThinkPad line).

nubzilla• 13 years ago

They do things like create web-based health insurance exchanges that are complete failures

http://www.mprnews.org/story/2013/12/20/faulty-mnsure-softwa...

http://minnesota.cbslocal.com/2014/01/07/legislative-auditor...

manishsharan2• 13 years ago

Is the market for low end servers still viable ? The alternative to a low end server is the cloud server and it is much better option financially.

I think we would see a trend where companies would sell hosted infrastructure solutions ( e.g. MS Exchange, sharepoint etc. , Databases , firewall, etc.) and throw in a cluster of low end servers for free.

codingdave• 13 years ago

We're talking hardware here - whether you own it yourself, or it is "in the cloud", there is still a metal box somewhere behind it all, so there is still a market for those metal boxes.

jzwinck3• 13 years ago

Yes, but the biggest cloud providers build their own hardware. Google, Facebook, Backblaze, and more to come I'm sure. Intel and Micron and Foxconn will remain happy, but vendors of turnkey servers perhaps less so.

manishsharan2• 13 years ago

My point was that there may be no viable market for the metal; there may be a very small market of service providers who might might require made to order servers or may be even build their own like here http://www.opencompute.org/ . There won't be any reasonable margins left in the low end server market to sustain a hardware only company

The existing market of SMBs and enterprises for "the metal" is going away.

Oculus• 13 years ago

Isn't Lenovo beginning to encroach into monopoly territory? I keep hearing how they are purchasing large chunks of the current PC market.

jzwinck3• 13 years ago

Hardly. HP and Dell cover most of the same ground, from laptops to mid-size servers. And the consumer space has Apple of course, and the enterpise has...SuperMicro? It has been more or less like this for some time now.

vonmoltke2• 13 years ago

SuperMicro doesn't sell pre-built machines. However, in the case of our small company, they have received the lion's share of the money we spent on high performance hardware in the past couple years, as we no longer buy pre-built machines for our cluster. We buy our desktops and laptops from Dell, though.

gnoway• 13 years ago

Supermicro yes, and you can actually buy Intel branded servers too. We've had really good experiences with Intel dual socket 1U and 4-in-1 2U systems.

rtkwe3• 13 years ago

In which business do they have no or limited real competition? In every product line there are 3+ other companies providing similar products.

astrodust4• 13 years ago

A monopoly on buggy whips? Oh well.

rtkwe3• 13 years ago

Yes of course because servers aren't and won't continue to be extremely important for providing everything on the web.

What exactly do you see as the automobile in your analogy?

ktavera• 13 years ago

In the grand scheme of IBM's business strategy this makes sense. They sold off their consumer PC market to Lenovo already. The hardware game is not where the big money is. Would you rather be selling relatively cheap hardware or have an army of high end consultants billing out at $250+/hour? You can contract IT infrastructure, application development, BPM, legal and many other services from their professional services division. Want to start an international bank? IBM's financial services and global services will help you out. This is purely just the next step in their evolution to a pure services company with some top notch talent.

iends7• 13 years ago

I'm not sure IBM wants to be a pure services company, in fact, software sales is a high margin business that makes IBM a huge chunk of change.

dandare• 13 years ago

It immediately reminded me of the mini-mills example from Clayton Christensen's amazing talk on Disruptive Innovation http://www.youtube.com/watch?v=B5FxFfymI4g

caniszczyk• 13 years ago

kind of fun watching IBM just disintegrate in slow motion

markshepard• 13 years ago

unfortunately, this is exactly what is happening. I started at IBM's server group (P-Series) and when I left (right around when Sam Palmisano retired) there was a slow move towards changing from a development company to acquisition company. Sad to see it decay.. hopefully they have a plan.

Nelson69• 13 years ago

Well, they're changing...

Honestly, for years watching them sell stuff and gradually back out it's looked like they were dying. Now it's very clear that they are making a gigantic bet on Watson and Watson like technologies. That's exciting.

gtirloni2• 13 years ago

Having worked at IBM I know they will do anything to make the quarter numbers look good. This $2.3bn will help for some time but I wonder what they will sell next.

mindslight• 13 years ago

Too bad IBM didn't trade it and get Thinkpad back.

scott_karana2• 13 years ago

I've been happy with my Lenovos. We had a bunch of T420s at my last employer, and they were solid.

Likewise, my personal X220 has held up fantastically.

Some of the new laptops follow annoying market trends (bastardized keyboards, lack of IPS screens, hard to repair, lack of connectivity options), but every other brand is doing that too.

kamilszybalski• 13 years ago

After IBM acquired softlayer technologies, this is a natural move.

soDotNet• 13 years ago

So much butt hurt here...x86 is a low margin commodity with too many companies out there racing to the bottom. I for one applaud to IBM's decision to evolve their business.

daniel-levin• 12 years ago

Lenovo said it would settle the transaction with $2 billion in cash and the balance in its own Hong Kong-listed shares.

Now this is the interesting part of the article. This means that IBM will own $300 million in Lenovo stock. Sure, it may dump them for cash, but it now has a stake in Lenovo, the company that 'has overtaken HP and Dell to become the world’s biggest manufacturer of PCs.'

Lenovo Agrees to Buy IBM Server Business for $2.3 Billion

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