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IBM sheds its x86 server business in a $2.3bn sale to Lenovo, continuing its record-breaking streak of divestitures. When the deal closes, Big Blue will have rid itself of a division that generated $4.6bn in revenue last year and, like most x86 server businesses, experienced declining revenue.
Asset sales generally go for about 1x revenue, and hardware and pure services businesses are usually valued below that. Still, at 0.5x revenue, the deal comes toward the low end of IBM asset sales, but it’s still far better than the last time these two companies met at the M&A table. In 2005, Lenovo acquired IBM’s PC business for just 0.16x sales. Only once has Big Blue sold a business for more than $250m and collected more than 1x revenue.
IBM’s largest divestitures
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Source: The 451 M&A KnowledgeBase
The sale lines up with several of IBM’s strategic ambitions. For one, it helps free the company to be a cloud services provider, instead of having to sell x86 servers to service providers while simultaneously competing with them. However, in some ways the move could complicate that effort, as Lenovo, which will be the primary supplier of x86 technology to IBM, may not be able to make the required R&D investments that will keep its products at the cutting edge. The Lenovo business model relies on volume shipments and won’t bear heavy R&D spending.
Also, the x86 business has low margins and shrinking revenue; unloading it will help Big Blue reach its goal of $20-per-share annual earnings by 2015. According to surveys by TheInfoPro, a service of 451 Research, customer spending on IBM servers has moved backwards a bit, with 36% of its customers in 2013 stating they would spend less on IBM servers during the following year, up from 23% and 27% in 2012 and 2011.
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