What Could The IBM-Lenovo Deal Mean For The Server, Storage Industries?
Beneath The Headlines, A Big Shift In The Server, Storage Business
Lenovo and IBM on Thursday said they finally came to a deal under which Lenovo will acquire part of IBM's server business for about $2.3 billion in cash and Lenovo shares.
The headlines, and much of the press hoopla, around the world tends to simplify the deal as one under which Lenovo is buying IBM's x86 server business, or part of it, or in some cases even making it appear as if the entire IBM server business is at stake.
Actually, the two vendors spell out in some detail what is included -- and not included -- in this new deal. And a deeper look at those details shows that the reverberations from the acquisition will ripple far beyond IBM's and Lenovo's server businesses.
Turn the page for a product line-by-product line look at what Lenovo is and is not buying, and what that means for both the server and the storage industry.
IBM's Vs. Lenovo's Server Viewpoint
The reason for the deal between IBM and Lenovo was summed up in one paragraph in a Thursday IBM SEC filing:
"IBM's model is based on continuous transformation, which includes a shift to higher value solutions for enterprise clients. Lenovo delivers value through high-volume, industry standard products that benefit from economies of scale. This transaction strengthens the business of both companies."
IBM value vs. Lenovo volume.
Let's see how this shifts server power between the two, and around the industry.
Gone From IBM: Commodity Servers
Under the terms of the deal, which will still require much government scrutiny before it closes, IBM is selling its entire x86-based server portfolio to Lenovo.
This includes System x, BladeCenter and Flex System blade servers and switches, x86-based Flex integrated systems, NeXtScale and iDataPlex servers and associated software, blade networking, and maintenance operations.
For IBM, this will result in a hit to top-line revenue, but an improvement in the bottom line.
IBM's x86 server business has an annual revenue of $4.6 billion, the company wrote Thursday in an SEC filing. However, it posted a post-tax loss of $26.4 million for the 12 months ended Dec. 31, Reuters reported. That compared to a $187 million profit in the 12 months ended March 2013, Reuters wrote.
Staying With IBM: High-Margin Mainframes And Appliances, Fast-Fading Power Servers
IBM is keeping its System z mainframes, Power Systems, Power-based Flex servers, and PureApplication and PureData appliances. The company is also keeping its storage business, although part of the agreement calls for Lenovo to OEM IBM's Storwize disk storage systems and its tape storage systems.
IBM will also continue developing its industry-leading Windows and Linux software portfolio for the x86 platform.
For Lenovo: x86 Servers
Under the deal, Lenovo will get IBM's x86 server business, along with several sub-categories including the blade servers.
It's a tough business. Gartner in December estimated that IBM in the third quarter of 2013 sold a total of 185,634 x86 servers, making it the No. 3 server vendor. However, that is down 29.8 percent over the 264,524 x86 servers it sold in the third quarter of 2012.
Almost as bad, IBM in the third quarter of 2013 had estimated revenue of under $1.2 billion from its x86 server business, down 17.6 percent over its prior-year revenue of more than $1.4 billion, Gartner estimated.
But this is a huge win for Lenovo, which Gartner in the third quarter estimated had worldwide server revenue of only $109 million. A big part of those sales were of servers Lenovo made using IBM server technology from a 2008 IBM-Lenovo technology agreement.
For Lenovo: Blade Servers
When the deal closes, Lenovo will get IBM's BladeCenter blade server line. That will give Lenovo instant credibility in the blade server market, which is one of the fastest-growing parts of the x86 server business.
IDC in December reported that third-quarter 2013 blade server revenue grew 7.7 percent year-over-year to reach $2.3 billion, or nearly 19 percent of total server revenue.
IDC ranked HP as the No. 1 blade server supplier, with a third-quarter 43.6-percent market share in terms of revenue. Cisco is No. 2, with a 20.4 percent share, followed by IBM at 18.3 percent.
For Lenovo: Converged Infrastructure
Once the deal closes, Lenovo will be knocking on enterprise account doors, and knocking heads with HP and Cisco, with a new converged infrastructure business.
Converged infrastructure, which combines server, storage and networking resources under a single management solution, is a fast-growing business. IDC in October reported second-quarter 2013 revenue for the worldwide converged infrastructure market grew 50.2 percent over revenue for second-quarter 2012 to reach $1.3 billion.
Lenovo's future in this market will come from IBM's Flex System converged infrastructure family of blade servers with integrated storage and server technologies. Lenovo will gain IBM's x86-based Flex technology, but not its Power-based Flex.
All the major server vendors already have converged infrastructure plays, including Cisco UCS, Dell PowerEdge VRTX and other offerings, HP Converged Systems, and others.
For Lenovo: High-end x86 Servers
Lenovo will also jump into the high-end x86 server business with the addition of two lines from IBM.
IBM NeXtScale is a family of ultra-dense x86 servers sold for technical computing, grid, business analytics, and cloud and virtualization applications. They can be configured with a mix of compute, storage and acceleration via GPUs or the Intel Xeon Phi coprocessor.
IBM System x iDataPlex is a high-performance, half-depth server targeting scalable high-performance computing applications. It is often found in large clusters or as part of a supercomputer.
Dell has traditionally been the primary branded vendor in high-density computing, and HP with its Moonshot family (pictured) is expected to be a significant part of this business.
The real variable, however, is whether high-density platforms designed by Web-scale companies such as Facebook under the open source Open Compute platform will catch hold in the general-purpose server market.
Not For Lenovo: IBM Mainframes
IBM on Tuesday reported its System z mainframe fourth-quarter 2013 revenue fell 37 percent year-over-year, although revenue in the fourth quarter of 2012 was up 56 percent from the year before that. This reflects the cyclical nature of IBM's mainframe business, which sees big swings in sales depending on the line's technology refresh schedules.
While Lenovo will not get IBM's System z mainframes, some of IBM's x86-based blade servers plug into those mainframes. That part of the blade server business will likely remain with IBM.
Not For Lenovo: IBM Power Systems
IBM is also keeping its Power-based server business, which has traditionally been associated with the Unix market. However, given the precipitous drop in Unix servers over the last few years, IBM has been moving to re-focus its Power servers as a Linux platform and for big data and the cloud.
Power got a huge boost from IBM early this month when IBM said it plans to invest $1 billion in a new Watson Group. Watson is based on IBM's Power server line.
Watson, originally a project to become the first computer to beat human players on the game show Jeopardy, is slated to become the foundation of a new line of intelligent systems that take advantage of big data and other technologies to provide instant answers to queries. IBM CEO Virginia "Ginni" Rometty late last year she expects Watson to become a $10 billion business with a decade.
Not For Lenovo: PureApplication Appliances
IBM is keeping its x86-based and Power-based PureApplication appliance line.
The PureApplication platform is highly scalable and tuned specifically for transactional Web and database applications.
Its closest competitor is Oracle's Exalogic (pictured) engineered system.
Not For Lenovo: PureData Appliances
Also staying with IBM is its PureData appliances, which are designed specifically for big data workloads.
IBM offers several flavors of PureData, including models for Hadoop and IBM Netezza.
Its primary competition is the Oracle Exadata (pictured) line of engineered systems.
Not For Lenovo: IBM Storage Systems
IBM decided to keep its Storage Systems line, despite the rocky times that part of its business is facing.
IBM on Tuesday said its fourth-quarter 2013 storage hardware revenue fell 12 percent year-over-year, despite double-digit sales growth of its relatively new Storwize product line.
However, as part of the planned new strategic relationship between IBM and Lenovo, IBM said it plans to let Lenovo become a global OEM and reseller of its Storwize disk storage systems and its tape storage systems.
That could lead to a rebound in IBM's storage business. And, for Lenovo, which is already working with EMC in storage, gaining access to IBM's storage hardware and software could finally make it a formidable force in the storage industry.
But Then Again, Who Knows?
All the speculation about the IBM-Lenovo deal could be moot if the acquisition is blocked by the U.S. government. Mergers like Lenovo's acquisition of IBM's entry-level server business must get clearance from the Committee on Foreign Investment in the U.S., or CFIUS, which examines such deals from a U.S. national security perspective.
The Wall Street Journal on Thursday wrote that, while such approval is not a given, neither IBM nor Lenovo would have entered into their agreement without believing that the deal would pass. One stumbling block is the difficulty in separating IBM's sensitive government and Defense Department organizations that depend on IBM's x86 server business, especially given that maintenance for the x86 servers is slated to be taken over by Lenovo, the Journal reported. However, Lenovo has passed three CFIUS reviews, including two in 2012, and x86-based servers in general have depended on manufacturing in China for years, the Journal reported.