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After business with IBM and Google, what’s Lenovo’s plan?

This article was originally published on Technology.Info.
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Not satisfied with its position as the world’s largest PC manufacturer, China’s Lenovo has entered into agreements to acquire the low-end, x86 server business of systems and software giant IBM for $2.3 billion (£1.3 billion), as well as the Motorola Mobility mobile handset business from Google, for just shy of $3 billion (£1.75 billion).

The aim is clear: Lenovo is is assembling a product portfolio that ranges from mobile handsets to PCs to servers in a bid to position it as a more business-friendly brand. The company also has in place an enterprise storage deal with EMC that gives it clout in that area, too.

Let’s take these two deals deals in date order: the acquisition of the IBM low-end server business was announced on 23 January, and executives at Lenovo are hoping to give that unit a makeover and make a success of it, just as they did with IBM’s PC business, acquired back in 2005.

The purchase includes IBM’s System x, BladeCenter and Flex System blade servers and switches, as well as its x86-based Flex integrated systems, NeXtScale and iDataPlex servers and associated software, blade networking and maintenance operations. During the transition, and for an as-yet unspecified period of time, IBM will continue with maintenance on these products.

Lenovo and IBM will also enter into a deal that includes global OEM [original equipment manufacturer] and reseller agreements for a variety of other IBM products, including entry and mid-range Storwize disk storage systems, tape storage systems and some components of IBM software, such as Systems Director and Platform Computing solutions.

The deal makes sense for both companies. IBM has struggled to handle this particularly commoditised area of its hardware business: its revenues from x86 servers declined by 16 per cent in the fiscal fourth quarter, following seven straight quarters of dwindling sales. Lenovo, by contrast, has a business model and the supply chain expertise required to shift low-margin hardware in very high volumes.

IBM executives are portraying the deal as an opportunity for them to focus on other parts of the business. “The divestiture [of the x86 server line] allows IBM to focus on system and software innovations such as cognitive computing, Big Data and cloud,” said Steve Mills, IBM's senior vice president and group executive of the Software & Systems Group.

And according to Peter Hortensius, Lenovo's senior vice president, it will enable Lenovo to boost its share in the worldwide server market from two per cent to 14 per cent.

The second deal, meanwhile, came on 30 January and came as more of a surprise to industry watchers - not least because Lenovo will pay $2.91 billion for a business that Google paid $12.5 billion (£7.6 billion) for not two years ago.

In a statement, Google CEO Larry Page said that the smartphone market was “super competitive, and to thrive it helps to be all-in when it comes to making mobile devices. It’s why we believe that Motorola will be better served by Lenovo - which has a rapidly growing smartphone business and is the largest (and fastest-growing) PC manufacturer in the world.”

Google will continue to develop the Android ecosystem, however, and is keeping hold of the majority of Motorola’s patents.

“As a side note,” said Page, “this does not signal a larger shift for our other hardware efforts. The dynamics and maturity of the wearable and home markets, for example, are very different from that of the mobile industry.” In other words, Google still has high hopes for Google Glass and home electronics, from TVs to smart utility meters.

Lenovo clearly has designs on corporate IT budgets. There’s a good chance, for example, that a business that buys its PCs from Lenovo will be more than happy to buy an email or web server from the company, too. But - and it’s a big but - fewer companies today are buying servers, particularly in the small and medium-sized enterprise (SME) category. Instead, they’re using cloud services, or at the very least, using virtualisation to cram as many of their workloads as possible onto fewer servers.

Motorola Mobility, meanwhile, is more of a consumer play - but in the age of ‘bring your own device’ (BYOD), the distinction between consumer and business devices has all but disappeared in any case.

But either way, if Lenovo can successfully integrate these new business units, without disrupting its phenomenally successful PC business, this is a strategy that should certainly be of concern to executives at Dell and HP.