Lenovo to double presence in NC with IBM server deal

dranii@newsobserver.comJanuary 24, 2014 

  • Deal at-a-glance

    The price: Lenovo has agreed to pay $2.3 billion for IBM’s x86 server business. The price includes about $2 billion in cash, with the rest in stock.

    The people: About 7,500 IBM employees in 60 countries are expected to be offered jobs by Lenovo.

    The relationship: Lenovo will start selling a number of IBM products, including data storage systems and software. IBM will continue to develop software for x86 servers.

    The maintenance: Lenovo will be in charge of x86 maintenance after the deal closes, but IBM will continue to handle maintenance on Lenovo’s behalf for an unspecified “extended period of time.” “So customers should see very little, if any, change in their maintenance support,” said Adalio Sanchez, IBM’s general manager for System x.

    The target date: Pending regulatory approval, the deal is expected to close in six to nine months.

    Sources: IBM and Lenovo

PC maker Lenovo will nearly double its presence in North Carolina after agreeing to pay $2.3 billion to acquire a line of servers from IBM, which is shedding one of its less-profitable businesses.

It’s the second major deal between the two corporate titans with major implications for the Triangle. In 2005, Lenovo, a Chinese company, entered the U.S. market and became a major employer locally when it acquired IBM’s PC business and the ThinkPad brand.

The latest deal will boost Lenovo’s small-but-fast-growing server business by nearly tenfold to more than $5 billion in annual sales, said Jay Parker, the president of North American operations. A server is essentially a souped-up PC that serves as a central processing hub for computer networks.

The deal also calls for Lenovo to take on about 7,500 IBM employees in 60 countries worldwide – including a major contingent in the Triangle.

IBM has been an anchor at Research Triangle Park for decades and is one of the region’s largest employers. However, neither IBM nor Lenovo officials would say exactly how many of the server unit’s employees work in the Triangle.

But Lenovo, which has about 2,500 employees in North Carolina – 2,200 at a headquarters in Morrisville and 300 at a manufacturing facility in Guilford County – will nearly double its presence in the state after taking on the IBM employees, Peter Hortensius, president of Lenovo’s product group, said during a conference call. And Parker said “the bulk of their U.S. employees are in the Triangle area.”

Lenovo has been outpacing its PC competitors for 18 consecutive quarters and last year became the No. 1 PC company worldwide. Nevertheless, it has been diversifying into other devices – including smartphones and smart TVs – in the face of slack demand for personal computers.

Hortensius called buying IBM’s low-end, x86 server business “the logical next step for us,” enabling Lenovo to become a major player in the server market much faster than it otherwise would. When the deal is completed, Lenovo will vault from No. 6 to No. 3 in servers, boosting its worldwide market share from 2 percent to 14 percent.

IBM’s x86 servers, which boast sufficient computing power to handle the day-to-day operations of a midsize business, have become a commodity business. IBM will continue to sell other servers and will also continue to develop and sell software for x86 machines.

Broadens Lenovo’s appeal

When Lenovo entered the server market in 2008, its initial devices were based on technology licensed from IBM, Parker said.

Technology analyst Roger Kay of Endpoint Technologies Associates said that the deal broadens Lenovo’s appeal to its business customers.

“The other thing is that Lenovo so far has demonstrated a pretty good ability to manage high-volume, low-margin businesses and still make a dime on them,” Kay said. “They are better at making money at a business like this than IBM is.”

The potential downside, said Kay, is that Lenovo isn’t well-established in the server business. That should be mitigated by the fact that all of IBM’s x86 management team is moving over to Lenovo.

“Lenovo has a good track record of retaining IBM employees,” Kay said. “If you look at the team that went over to Lenovo from IBM (in 2005), many of them are still in place.”

Although the server business IBM is selling is low-margin compared with its portfolio of software and services, Parker said it’s significantly more profitable than Lenovo’s PC business.

While Lenovo is a company on the rise, IBM has been struggling.

IBM’s ‘rebalancing’

This week, the company said it would take a charge of about $1 billion in the quarter stemming from a major round of layoffs, which in IBM-speak is “workforce rebalancing.” The pending job cuts come in the wake of the company’s seventh consecutive quarter of declining revenue.

Tom Rosamilia, a senior vice president at IBM, said of the pending Lenovo deal: “We have a really good track record of continually remixing our portfolio to focus on higher-value products for enterprise clients.”

Rosamilia stressed that IBM is continuing to spend on innovation. He noted the company recently announced it would invest more than $1 billion in a new business group centered around the Watson supercomputer – which rocketed to fame on the TV quiz show “Jeopardy” – and $1.2 billion to expand its cloud computing efforts to 40 data centers worldwide.

Rosamilia also said that IBM remains committed to the Triangle.

IBM doesn’t disclose how many employees it has locally. But an official for a union that has been trying to organize the company’s workforce for years estimates that IBM’s workforce has dwindled from 11,000 in 2006 to between 7,200 and 7,600 today.

Lenovo expects the deal to be completed in six to nine months, but technology analyst Rob Enderle of The Enderle Group said the political environment could be an obstacle to winning regulatory approval.

“The NSA stuff has everybody and their brother worried about security,” he said. “And China and the U.S. aren’t exactly getting along all that well at the moment.”

Ranii: 919-829-4877

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