:format(webp)/cdn.vox-cdn.com/uploads/chorus_image/image/63705164/lenovo.0.1544384342.0.png)
In buying the x86 server business from IBM, Chinese computing giant Lenovo is repeating a move it made almost a decade ago when it bought Big Blue’s personal computing business.
That deal gave Lenovo control of a well-liked brand of notebooks, the ThinkPad line, which in turn gave it the ability to establish toe-holds in several markets around the world. It was seen then as a key milestone in Lenovo’s history, and today the company is the largest supplier of personal computers in the world, ahead of Hewlett-Packard and Dell. Never mind the fact that last year marked the worst year ever in that business.
You can bet that Lenovo CEO Yang Yuanqing is hoping that a repeat in the server market is coming. The dynamics of this deal are comparable in many ways, but also different. In 2004, IBM was an also-ran player in the PC market, well behind Dell and HP. Its business was declining amid dropping selling prices, and trying to stand out with a higher-priced product wasn’t working.
Similar things are happening in the x86 server business. These servers — which contain chips from Intel and sometimes its rival, Advanced Micro Devices (the x86 designation comes from the name of the instruction set running on the chip) — are increasingly referred to as “commodity servers,” meaning there’s not much differentiating hardware from one vendor or another.
That’s a strength for Lenovo. “We tend to thrive in these commodity hardware environments,” Lenovo Senior VP Peter Hortensius said during a conference call with reporters held earlier today.
Selling these servers, which usually get packed by the thousands into large buildings called data centers, was a $36 billion business in 2012, according to market research firm IDC. And in the third quarter of 2013, HP was the market leader, commanding nearly a third of global x86 server sales. Dell was second, with a little more than 20 percent, and IBM was third, with a little more than 12 percent.
On the conference call, Hortensius said the acquisition will help Lenovo leapfrog from sixth place in the global market to third place.
The one notable thing about IBM’s Q3 position was IDC’s estimate that Big Blue has seen revenue fall by more than 17 percent. It has another line of servers that use its own proprietary chips — the Power line — that put it solidly in second place behind HP in the overall market for servers.
In announcing the deal, IBM disclosed that the x86 server unit brought in about $4.3 billion in sales in 2013, which makes the $2.3 billion purchase price exactly half of annual sales. Toni Sacconaghi, an analyst with Bernstein Research, says that’s in line with the 0.2 times sales that Oracle paid to acquire Sun Microsystems in 2010.
There are some risks. For one thing, the deal will have to be cleared by federal regulators for national security concerns. There’s been a general suspicion in Washington around China-based companies buying U.S.-based tech assets. When Lenovo bought IBM’s PC unit in 2004, the deal triggered an investigation by the inter-agency Committee on Foreign Investment in the U.S. Typically a 30-day investigation takes place automatically, and the committee can order a more intensive review that can last up to 45 days. Finally, President Obama will have the last say, either vetoing or approving the deal.
The PC deal was scrutinized heavily, but was eventually approved by the Bush administration. Bernstein’s Sacconaghi said he expects the longer investigation with this deal as well. “Approval isn’t 100 percent certain,” he said. “We believe that an x86 server deal could also trigger a 45-day investigation, especially given that servers play a more critical role in company and government IT infrastructure and ongoing tensions between China and the U.S. surrounding technology following revelations from [Edward] Snowden.”
In recent memory, CFIUS investigations have forced Huawei, the China-based telecom gear maker to abandon an effort to acquire 3Com in 2008. (3Com is now part of HP.) In 2010 Huawei was also forced to walk away from a deal to buy 3Leaf Systems.
After the regulators, Lenovo must still deal with the matter of winning over former IBM customers. “The deal instantly makes Lenovo a major player in the enterprise data center business,” said Patrick Moorhead, head of research house Moor Insights and Strategy. “Lenovo will need to execute the transition flawlessly or risk losing the hearts and minds of enterprise CIOs, who tend to be really conservative.”
This article originally appeared on Recode.net.
