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"You don't get paid for the hour. You get paid for the value you bring to the hour."

-Jim Rohn

January 23,2014

Lenovo to Acquire IBM’s x86 Server Business

martinwolf Transaction Analysis
Financial Overview
  • Total Transaction Size: $2.3 Billion
  • Implied Enterprise Value:  $2.3 Billion

Transaction Facts

  • Lenovo Group Limited (SEHK:992) announced that they entered into a definitive agreement to acquire IBM’s x86 server business for approximately $2 billion in cash and the remainder in shares of Lenovo.
  • With this deal, Lenovo stands to increase its market share in the server market from 2% to 14%. Currently, HP holds the largest share at 32% and Lenovo does not appear in the top five.
  • Approximately 7,500 IBM employees are expected to be offered jobs by Lenovo to go along with the division.
  • The complete server unit has estimated revenues of approximately $5 billion per year, but IBM does not break out sales for the individual divisions.
  • IBM was previously in discussions with Lenovo about purchasing the unit last year, but the proposed transaction fell apart reportedly due to price differences.

Smart for Both Sides: Consolidating Strengths

  • Low Margin, High Volume: The x86 server market has been turbulent with many potential customers opting to either build their own servers or work directly with third party manufacturers. Though this was once considered a high margin market, its growth has slowed and companies largely compete on volume.
  • Shedding Low-Margin Divisions: IBM has recently been shedding its lower-margin offerings and instead focusing resources on competing in cloud, big data and higher margin services. IBM is retaining its higher margin server offerings, where it boasts a 57% market share, and has also announced plans to spend approximately $1 billion each on its Watson software business and new cloud computing data centers.
  • Continuing a Trend: This is the latest example of IBM removing its lower margin businesses and consolidating its offerings, as it did in September selling their customer care BPO services to SYNNEX and in 2005 when they sold their Thinkpad division to Lenovo.
  • Breaking Records: This deal will be the biggest-ever tech acquisition by a Chinese buyer as Lenovo, the largest PC manufacturer in the world, looks to capitalize on their scale and add what is for them a relatively higher margin offering to compete with other manufacturers.

 

For more information, read the press release here. martinwolf was not the advisor in this transaction.

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