Will IBM be able to sell its server division to Lenovo?
A must-know business overview of IBM and its new strategies (Part 10 of 10)
IBM sells its server division
As part of its strategy to invest in growth areas and shift from low-margin to high-margin businesses, IBM announced the sale of its server division to Lenovo for $2.3 billion. The deal was expected to close by the end of 2014. But now the deal is stuck due to security issues.
This isn’t the first deal between IBM Corp. (IBM) and Lenovo. In 2005, when Lenovo acquired the personal computer division—ThinkPad notebooks—from IBM for $1.75 billion, it faced scrutiny too. Now, in 2014, it seems history is repeating itself. The acquisition of IBM’s x86 server portfolio by Lenovo has once again come under scrutiny.
The x86 server market, as of September 2013, amounted to $43.2 billion. The chart above shows the position of various players in the x86 server market. HP (HPQ), with its 27% market share, leads the market. It’s followed by Dell Inc., (DELL) which commands a 22% market share. IBM, CISCO (CSCO), Hitachi, and Teradata (TDC) are among the other leading players in the server market.
Security issues
The x86 server portfolio acquisition deal has come under scrutiny. U.S. regulators are worried about security issues.
CFIUS, or U.S. security officials and members of the Committee on Foreign Investment in the U.S., is the panel responsible for screening deals that could have national security implications.
x86 servers are used in highly sensitive and confidential communication networks and data centers. If acquired by Lenovo, they can be accessed remotely by Chinese spies or hackers or compromised through maintenance.
Although IBM said it will continue to provide maintenance to Lenovo for an extended period after the sale, U.S. government officials don’t find this sufficient enough to address the security issues surrounding the deal. Also, U.S. government officials believe the x86 server portfolio can become a powerful supercomputer.
We have yet to see if the deal gets final approval. The deal got approval from regulatory authorities in China. Both Lenovo and IBM have re-filed their applications for approval. According to Dealogic, if finalized, the server acquisition deal would be the largest by a Chinese company in the U.S. technology sector.
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