IBM to sell x86 server business to Lenovo

Date: 23 Jan 2014 Thursday

IBM to sell x86 server business to Lenovo

On January 23, 2014, IBM announced that it has entered into a definitive agreement with Lenovo, in which Lenovo will acquire elements of IBM’s x86 server portfolio.

A copy of the announcement press release is available here

Strategic Rationale

In the dynamic IT industry, companies need to continually reinvent themselves to bring long term value for clients.

IBM’s model is based on continuous transformation, which includes a shift to higher value solutions for enterprise clients. Lenovo delivers value through high-volume, industry standard products that benefit from economies of scale. This transaction strengthens the business of both companies.

IBM will continue to deliver value in high end systems, software and services, with a focus on driving innovations in the strategic areas of big data and analytics, cloud, social, mobile, and security. IBM’s System z mainframes, Power, and storage systems provide unique capabilities to exploit these growth areas.

Transaction Details and Business Relationships

IBM will sell to Lenovo its System x, BladeCenter and Flex System blade servers and switches, x86-based Flex integrated systems, NeXtScale and iDataPlex servers and associated software, blade networking and maintenance operations.

IBM will continue to develop and evolve its Windows and Linux software portfolio for the x86 platform.

IBM and Lenovo plan to enter into a strategic relationship which will include a global OEM and reseller agreement for sales of IBM’s industry-leading entry and midrange Storwize disk storage systems, tape storage systems, General Parallel File System software, SmartCloud Entry offering, and elements of IBM’s system software, including Systems Director and Platform Computing solutions.

Following the closing of the transaction, 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.

The transaction is expected to close later this year, subject to the satisfaction of regulatory requirements, customary closing conditions, and any other required approvals. Subsequent local closings will occur subject to similar conditions, agreements, and the information and consultation process in applicable countries.

Financial Implications

Proceeds and Gain

The transaction price is $2.3 billion and as consideration, IBM will receive approximately $2 billion in cash, with the balance in Lenovo stock.

IBM expects to recognize a total pre-tax gain on the sale of approximately $1 billion. This gain will be recognized consistent with the closing schedule for the transaction.

The exact amount of the gain and the breakdown by closing date is not yet determinable. The variables that can impact the final gain include the valuation of the final balance sheet transferred, the valuation of other related agreements, and transaction-related expenses.

This gain was not included in the 2014 operating earnings per share guidance of at least $18.00 provided by the company on January 21, 2014.

Revenue and Profit Impact

IBM’s worldwide x86 business is reported in IBM’s Systems and Technology segment, and the associated maintenance operations are part of the Global Technology Services segment. In 2013, this combined business delivered $4.6 billion of revenue, and was essentially breakeven on a pre-tax income basis. As a result, this transaction results in a higher margin profile consistent with IBM’s longer term business and financial model.

Additional information will be provided at the time of the closing later in the year.

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