Lenovo Buying IBM Server Business For $2.3 Billion

Chinese technology company Lenovo and the U.S-based IBM IBM -3.1% are extending their business relationship: Lenovo, which acquired IBM’s ThinkPad line of PCs in 2005, has agreed to buy IBM’s low-end server business for $2.3 billion, the companies announced Thursday morning.

Lenovo will pay $2 billion in cash and $300 million in stock to acquire IBM’s x86 server business, a segment that includes IBM’s System x, iDataPlex servers and other server maintenance operations. As part of the agreement, IBM will continue to develop its Windows and Linux software for the server platform, but Lenovo will assume customer service and maintenance responsibilities for the system once the deal is closed. In the interim, IBM will continue to provide maintenance and customer support and said that customers should see little change in the technical support available to them.

The companies did not say when they expect the deal to close.

“This divestiture allows IBM to focus on system and software innovations that bring new kinds of value to strategic areas of our business, such as cognitive computing, Big Data and cloud,” Steve Mills, senior vice president of IBM Software and Systems.

One innovation Mills is almost certainly referring to: IBM’s Watson Group, which the company recently announced would receive a $1 billion investment. The goal is to take the supercomputer — which famously competed on Jeopardy! — and apply its intelligence and technical capabilities to better develop cloud computing and business analytics.

Others, like RBC analyst Amit Daryanani, argue that the $1 billion in net gain IBM will receive from the sale of the x86 business is best suited for a share buyback. In a note released Thursday morning, Daryanani called the deal a “net positive for IBM, as it reduces its exposure to commoditized hardware” and said that such an investment would bolster IBM’s earnings per share.
“As part of the transaction, Lenovo will become a global reseller for IBM’s hardware and parts of its software solutions as well. We think this could be a positive for IBM, especially given the challenges it is facing in China currently,” Daryanani added.

For Lenovo’s part, executives said that the deal helps the company’s global PC strategy. “With the right strategy, great execution, continued innovation and a clear commitment to the x86 industry, we are confident that we can grow this business successfully for the long-term,” Yang Yuanqing, Lenovo chairman and CEO, said in a statement Thursday.

Following news of the deal, shares of Lenovo ticked up 3.5% Thursday morning, while shares of IBM were up just 0.4%. Year over year, Lenovo is the clear winner of the two: it’s up 29% since this time in 2013, while IBM is down 11%.


Business confidence improves in Q1 2014

Business optimism saw a significant rise in the first quarter of 2014 mainly on sales volume, net profit and new orders on the hope of better political stability, a Dun & Bradstreet report said. The D&B Composite Business Optimism Index for Q1 2014 recorded a significant increase of 16.6 per cent.
“In fact, optimism in three segments, namely volume of sales, net profit and new orders, stands at an 11-quarter high for the period Jan-Mar 2014.
Hopes of greater political stability and accompanying certainty on the policy front could be partly responsible for the trigger in business sentiment,” Dun & Bradstreet President and CEO, India, Kaushal Sampat said in a release issued here.
“Concerns regarding the size of the current account deficit as well as its financing have eased, while hopes of a recovery in the investment cycle have gathered strength with the Cabinet Committee on Investment facilitating a substantial number of clearances for large projects,” Sampat said.
Installation of a stable government after the elections combined with policy moves to de-bottleneck large projects will help to counterbalance any possible impact from the Fed’s decision to taper its monetary stimulus, he added. A significant majority of the respondents expect volume of sales to increase by 83 per cent in Q1 2014, while 5 per cent anticipate the sales volume to decline and the remaining 12 per cent expect volume of sales to remain unchanged.
The report found that around 78 per cent of the respondents expect an increase in profits during Q1 2014, while 17 per cent indicated they expect no change in net profits and 5 per cent expect their net profits to decline.