International Business Machines Corp. Finally Sells Server Division to Lenovo

IBM's server division is going to China, leaving Big Blue far more focused on software and services.

Jan 23, 2014 at 1:10PM

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These stately System X servers will soon be a Lenovo brand. Image source: IBM.

At long last, IBM (NYSE:IBM) and Lenovo have signed on the dotted line. IBM is selling its x86 server systems business to the Chinese systems builder, dramatically reducing Big Blue's hardware dependency.

The deal includes all IBM servers built around Intel (NASDAQ:INTC) or Advanced Micro Devices (NASDAQ:AMD) processors, running Windows or Linux. AMD and Intel will shrug and move on, since Lenovo is taking over the business. It's not like IBM just killed the entire System X server line -- the products are just under new management.

Lenovo will bring "continued innovation and a clear commitment to the x86 industry" to the table, according to Lenovo CEO Yang Yuanqing. IBM's commitment here is clearly fading, so let's call it an upgrade for Intel and AMD.

Moreover, IBM isn't giving up on servers entirely. The company will still develop, market, and sell mid-tier servers using IBM's proprietary Power processors, alongside System Z mainframes and IBM's storage solutions.

Lenovo is paying $2.3 billion for IBM's x86 server lines in a combination of cash and Lenovo stock. You'll recall that Lenovo once paid $1.25 billion for IBM's PC systems group. This new deal is simply a second dip into a well-worn strategy.

And may I remind you that the first deal didn't exactly kill Big Blue? IBM has been crushing the market since getting rid of its low-margin PC segment:

IBM Chart

IBM data by YCharts.

IBM will continue to sell System X servers, but as a reseller partner to Lenovo rather than under the old IBM badge. In return, Lenovo will resell IBM's storage hardware and cloud services, giving IBM another big entry point into Lenovo's Chinese home market.

When rumbling of this deal first emerged nine months ago, I thought it was a terrible idea. IBM would sacrifice its admired one-stop-shop business model in return for a quick cash infusion. But that was before IBM's strategy change became obvious, and the Lenovo deal suddenly makes sense.

IBM is all about high-margin software sales and support service contracts now, and CEO Ginny Rometty is simply taking the next logical step in that transformation.

Good move, Ginny. You can teach a 103-year-old dog new tricks, after all.

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Fool contributor Anders Bylund owns shares of Intel. The Motley Fool recommends and owns shares of Intel. It also owns shares of International Business Machines. Try any of our Foolish newsletter services free for 30 days.

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