IBM, Lenovo Deal Is All About Winning

Selling the x86 line to Lenovo makes perfect business sense for IBM, Lenovo and their respective customers and business partners. Lenovo has a proven record, experience in high volume x86 desktop hardware, and a long history of working with IBM. Customers and business partners can be confident that Lenovo has a very high probability of succeeding with the x86 server businesses.

Lenovo Group's US$2.3 billion deal to purchase IBM's low-end, commodity x86 Server portfolios, related resources and operations is an all-around win for everyone involved.

The sale of the IBM x86 servers has been rumored for well over a year, as Big Blue grappled with continuing pressure on its low-margin x86 servers.

In its most recently completed fourth quarter, IBM's revenue dropped 5.5 percent to $27.7 billion. Slumping hardware sales was the chief culprit for the revenue miss. IBM's x86 server sales declined by 16 percent in the fourth fiscal quarter alone, following seven straight quarterly revenue declines.

Under the terms of the agreement, Lenovo will purchase the following:

• IBM's System x servers;
• BladeCenter and Flex System blade servers and switches;
• x86-based Flex integrated infrastructure systems;
• NeXtScale and iDataPlex servers and associated software; and
• IBM's blade networking and maintenance operations.

Additionally, Lenovo gets all of the development, sales and marketing, finance, legal, integrated supply chain, operations, IT, manufacturing, and service and support (maintenance) operations associated with the aforementioned assets.

Also as part of the deal, Adalio Sanchez, general manager for System x and Pure Systems in the IBM Systems and Technology Group, will move to Lenovo and assume the same role there.

Approximately 7,500 IBM employees worldwide -- including those based at major locations such as Raleigh, N.C.; Shanghai and Shenzhen, China; and Taipei, Taiwan -- will be offered employment at Lenovo. Since Lenovo's U.S. headquarters in North Carolina is close by IBM's Raleigh offices, it should be an easy transition for the majority of Big Blue workers.

Digging Deeper Into the Deal

IBM will by no means abandon its high-end server business. Following are additional important provisions of the deal:

• IBM will retain its enterprise systems portfolio, including System z mainframes, Power Systems, Storage Systems and Power-based Flex servers, as well as the PureApplication, PureData and SAP Hana appliances;
• IBM and Lenovo will enter into a broad-based strategic collaboration;
• Lenovo will become IBM's preferred supplier of x86 server technology;
• Lenovo will license, manufacture and resell IBM Storwize and tape storage technologies, the General Parallel File System, the SmartCloud Entry, elements of the x86 system software portfolios, and the Platform Computing portfolio;
• Integrated systems software components will move to Lenovo;
• Higher-level management tools like System Director and Flex Systems Manager will remain with IBM and be licensed by Lenovo;
• IBM and Lenovo will work together on patches to IBM software required by Lenovo; and
• Until the transaction is completed, the two companies will continue to operate independently.

The acquisition is expected to close later in 2014, pending regulatory approval. Once the transaction is complete, Lenovo will assume related customer service and maintenance operations. IBM will continue to provide maintenance delivery on Lenovo's behalf for an extended period of time, so customers should see few or no changes in their maintenance support.

Both the IBM and Lenovo executives enthusiastically applauded the deal.

"The divestiture [of the x86 server line] allows IBM to focus on system and software innovations ... such as cognitive computing, Big Data and cloud," said Steve Mills, IBM senior vice president and group executive of the Software & Systems Group.

The acquisition of IBM's x86 server portfolio will enable Lenovo to increase its current 2 percent niche market in servers by sevenfold to 14 percent, noted Peter Hortensius, senior vice president at Lenovo and president of its Think Business Group.

To accomplish that goal and "generate costs synergy," Hortensius said, Lenovo will need to move most of the manufacturing from IBM's existing facility in Virginia to Asia, while keeping some R&D in the U.S.

The Takeaway

Lenovo's acquisition of IBM's low-end, commodity x86 server portfolios is a tactical and long- term strategic win not only for IBM and Lenovo, but also for their respective business partners, customers, and the 7,500 IBMers who will make the move to Lenovo.

IBM and Lenovo have had a long, productive working relationship. Lenovo in 2005 bought IBM's PC business, including the popular ThinkPad brand, for $1.7 billion; by 2012, Lenovo had surpassed all rivals to become the world's top PC vendor.

IBM is following the money and the market trends. IBM's server business is the world's second-largest, with a 22.9 percent share of the $12.3 billion market in the third quarter of 2013, according to Gartner.

In fact, IBM's System z Enterprise mainframe and high-end server market share and demand remain strong and solid. Overall, IBM mainframes have in excess of 90 percent market share in that segment.

The sale of the struggling x86 server line frees IBM to focus on what it does best: enterprise products and services -- most notably, cloud computing and services, and Big Data Analytics via its soon-to-be-expanded Cloud Computing group and its newly formed Watson Business Unit.

No company has broader, deeper enterprise and services portfolio than Big Blue. IBM's sale of its x86 Server business for $2.3 billion pays for its investment earlier this month of $1 billion in the new Watson BU headquartered in New York City, as well as the $1.2 billion it's investing in expanding its Cloud Computing portfolio in 40 global data centers in 15 countries on five continents.

Is the $2.3 billion sale much less than IBM's rumored $6.5 billion asking price for the x86 servers last summer? Probably. It was IBM's decision to sell the x86 commodity server portfolio and associated services and make a swift, clean exit. The alternative was to retain the x86 server line and let it continue to bleed revenue and drain resources.

IBM is simultaneously shedding unprofitable products and thereby effectively funding its expansion into leading-edge and emerging market segments.

Selling the x86 line to Lenovo is an intuitive and obvious move that makes perfect business sense for IBM, Lenovo and their respective customers and business partners. Lenovo has a proven record, experience in high volume x86 desktop hardware, and a long history of working with IBM. Customers and business partners can be confident that Lenovo has a very high probability of succeeding with the x86 server businesses just as it has with IBM PCs.

Finally, there is the human element. The IBM/Lenovo x86 agreement also positively impacts 7,500 Big Blue employees globally. They can transition to Lenovo, which also has offices in Raleigh, N.C., so few, if any, will have to move.

The IBM/Lenovo deal opens the door wider for IBM to expand its footprint in China and the Pacific Rim.

In Conclusion

To sum up, IBM's sale of its x86 business to Lenovo is the best possible outcome for all concerned.

Both companies must still execute once the transaction gets the necessary regulatory approval and closes. However, based on past history, the likelihood of success is high.

IBM will be able to forge ahead unhindered in its quest for continued innovation in enterprise systems and in the highly competitive cloud computing arena.

Facebook at 10: All Mobile Systems Go

Facebook came perilously close to missing the mobile boat a few years ago, but it saw the light -- aided, no doubt, by the glare coming from investors -- and embarked on a strong mobile strategy. Now the company appears poised to live long and prosper, as long as it can avoid making any big mistakes. The bigger they are, the harder they fall and all that.

This week in 2004, Harvard undergrads became the first group to use Facebook -- the social network launched at the college. Fast-forward a decade, and the company is a technology mammoth, with 1.23 billion users and profit of US$1.5 billion for 2013.

Facebook is by most accounts a gargantuan success, and it is putting the pieces in place for its next decade and beyond. Those pieces point to a mobile future.

Facebook was somewhat late to the game with mobile. Before its 2012 acquisition of Instagram, it had neglected the rise of smartphones in favor of the PC. Now, however, Facebook has switched focus to mobile and already is starting to see the benefits.


All About Advertising

Many investors were concerned Facebook was losing out on advertising revenue as users shifted to mobile. Yet the company revealed in last week's fourth-quarter earnings report that mobile advertising accounted for 53 percent of the $2.34 billion total advertising revenue, up from 23 percent in the year-ago period. Perhaps not coincidentally, Instagram started displaying ads for the first time last quarter.

The focus on mobile is set to intensify further with this week's launch of Paper, a new mobile app for viewing user-generated and curated content.

The application is the first to be released by the company's Creative Labs division. The unit allows small teams at the company to create standalone mobile apps outside of the core Facebook experience.

"Last week's financial results are an indication that Facebook has been closer to understanding the mobile ads business and has attracted the attention of corporate clients in trying out its mobile ad solutions," said Markos Zachariadis, assistant professor of information systems at Warwick Business School.

"Both the acquisition of Instagram and the development of Paper show that Facebook is making a move from its traditional Web-based page towards mobile solutions that will meet the demands of both its user-base and organizations that are looking to reach out to consumers in a more dynamic way," he told the E-Commerce Times.


'Good Direction'

"Predictions for the near future suggest that in 2017 nearly 4 billion people will access the Internet through their smartphone," Zachariadis added. "To put this into perspective, you need to compare with the current figure of Internet users -- less than 3 billion from both mobile and desktop devices."

Facebook is headed "in a good direction," he concluded.

CEO Mark Zuckerberg, meanwhile, hinted at some future plans in an interview with Bloomberg last week. His three-year plan puts mobile at the forefront -- he declared at an all-hands meeting in early 2012 that Facebook would be a mobile-first company from then on.

Facebook may become a little more lax with its requirement for users to use their real names, Zuckerberg suggested. That rule that has seen many would-be users in countries with oppressive regimes turn to pseudonym-friendly Twitter to get involved in the global conversation. Future Facebook apps may not require users to log in with Facebook credentials.


Solving New Problems

Within the next five years, Facebook aims to become more intuitive and help users solve problems they may not even have considered. When users turn to their Facebook friends for advice on finding a great local dentist or restaurant, for instance, Facebook should be doing better at using its trove of data to answer those questions, Zuckerberg told Bloomberg.

Over the next decade, Facebook will work to expand Internet access to the billions of people who do not yet have it, he said. Facebook has teamed up with technology companies like Samsung and Qualcomm on Internet.org, a project that aims to help users in developing countries get access to Web services, including Facebook, through cheaper phones.

Facebook still faces many challenges in the years ahead.


Security, Cultural Concerns

"Challenges in security and privacy are two major concerns [of] global social networks, including interorganizational networks," said Warwick Business School's Zachariadis.

"Also, compliance with local and international laws and regulations is a matter that often emerges as part of the globalization agenda. If Facebook's target -- as Mark Zuckerberg suggests -- is to socially connect the whole world, these are issues that need to be addresses regardless ... of the strategy the company will choose to move forward."

Elsewhere, Facebook might have to work harder to maintain user interest.


'Household Name'

"They're going to have to continue to do things that are engaging people and getting people to share and drive traffic in that regard," said Gordon Owens, digital marketing professional at GO Digital WSI.

"It's a household name now, so no one thinks about it. They need to keep doing things that make people go back and say, 'This new thing Facebook's doing is really cool and I've gotta go check it out,'" he told the E-Commerce Times.

"With a massive audience like that, they're just one or two wrong moves away from losing a ton of people," Owens suggested. "If you have some massive security breach or people find out that Facebook has been feeding all their data to the NSA -- all of a sudden everyone stops using it. I think you sort of run that risk. Other than that, they would have to do something utterly, drastically wrong to not be able to continue to drive revenue into the future."