 Good morning, I'm Kristen Folletti and welcome to Newstaff's Consolidation Angle TV for Tuesday, April 23rd, 2013. A unique arrangement may be brewing between IBM and Lenovo. Join us now to tell us more about the reported deal is Wikibon co-founder and CTO, David Floyer. Good morning, David. Good morning, Kristen. Back in 2004, IBM sold its PC business to Lenovo. David, how did that deal work out for both parties? It worked out well. At the time, HP was by far on the lead. Dell was there as well, compact. And IBM decided that it should get out of a market that it created when it first brought the PC with Microsoft to the market. And that worked out well for IBM. If you look at the problems that Dell and HP have had with declining PC sales and very, very thin margins. And look at the success that Lenovo has made. It's now grown its share to 15% in 2012 and is among the more profitable of the companies. It's worked out well for both parties. So tell us about this new rumor deal. Well, the amount of detail about it isn't a great deal. I mean, it's just that they're talking about it. And the assumption is that they will do the same type of deal, which is give all of the design and the manufacturing of the X86 boxes to Lenovo. I don't know whether it goes any further than that. Whether it also goes to the I-Series or P-Series, I don't think it would go as far as the mainframe, the Z-Series. But the most likely deal is with the X86. And that, of course, is where most of the current future of computing is going, especially the hyperscale area of computing. Now, do you think a deal between IBM to sell the X86 to Lenovo would be a good thing? I don't. There is a huge ground shift taking place in computing. It's going to take place over the next five to ten years. These sort of deals are neither five to ten year horizon to make them practical or not. Strategically, with the previous deal, IBM said, OK, if we're not in the PC business, but we are a partnership with Lenovo, we will do OK. Our services part of that will not suffer that much. And they were right. However, it's very, very different with how computing is going. Sure, it's going to the cloud and there will be cloud providers. But one of the most important decisions they've made is to invest $1 billion in flash. And the point about flash is that storage is going to move from the storage arrays where IBM is still competing towards the data, towards the server. And the key of that is having new architectures within the server that will take advantage of flash being very, very close to that server and making clustered systems. If you give away your core competence in X86 and your ability to design those systems to Lenovo, you're going to go into that emerging marketplace with one hand tied behind your back. And I think that strategically will be a big mistake for IBM. Now, if these two parties are considering such a deal, obviously they must see some appeal there. So how might the deal benefit both parties if they were to move forward? Well, yes. I mean, IBM will get a short-term infusion of cash and these results haven't been stellar in the last quarter. And Lenovo will get a bargain. They will get the X86. They will get the ability to move into the hyperscale market. They'll get the ability to move into the enterprise long-term with new architectures with high margins. So for Lenovo, it's an absolutely sound deal for IBM. It may help this quarter's problems, but it's strategically utterly the wrong thing to do in my opinion. Now you mentioned IBM's investment in Flash. Would the divestment of X86 servers impact IBM's $1 billion investment in Flash? Absolutely. It would be then just a storage investment and it would be around a big part of the marketplace, which is Flash storage as a replacement in the San area, in the low performance San area. But low performance Flash area, low being one millisecond is still pretty fast. But the real excitement is new architectures, new designs of applications, building in an ecosystem which includes IBM's development software, its application systems, this databases and tying those into what will be the standard, the X86 standard in the marketplaces. Maybe that changes to an arm standard over time. But without the ability to compete in that marketplace, they will be left to design those systems on their own systems like the I and the P, which are fine, but are not going to compete in the hyperscale markets. There's going to be a very, very limited space for them to compete for those. So, yes, I think it's strategically a huge mistake for IBM to do that and it will impact that investment in Flash. David, you're obviously very clear about the fact that you disagree with such a deal moving forward. Who else do you think shares in your opinion? This is very new, so I don't know who shares that. I haven't shared it with many people. I've listened to only a couple of commentaries on it and I think they've missed this point completely that it makes no sense to invest a billion dollars in Flash and at the same time get rid of the X86 when that billion dollars in Flash investment is about the server and the key server is the X86. So, I haven't seen my concerns in print, but at the same time, what I've been doing is looking at this strategic thrust of Flash and the changes in architecture and changes designs and hopefully we will make an impact. I think it's a very important subject. How likely do you think this deal is to take place? Well, I'm a CTO analyst. I'm not a buy side predictor. If it's reached the stage, I think it will has a significant chance of going through because they're letting the world know about it. So it's reached a stage. I again think that they need to look at this through a different prism rather than just short-term sale of assets. But yes, unfortunately, I think it's probably going to happen. If the deal does go through, what sort of long-term impacts do you see this having on each company? Well, Lenovo is clearly, unless there's a huge amount of money that's changing hands, Lenovo will make the best part of that deal, I'm sure. It's possible they might be able to manufacture a deal where IBM jointly developed some of these systems that that's possible. Those are very difficult to work out. But for IBM, I think it really spells the end of its systems approach and it will become purely a service company with maybe a reseller of things. It will lose its heritage of being a technology company. Well, David, thank you so much for sharing your point of view with us this morning. We appreciate you taking the time with us. Have a great day. Thank you. And on the way, HTC, facing legal action and Groove Shark launches some new features. But up next, SiliconANGLE contrarian editor John Casoretto stops by to comment on the recent claims made about Microsoft.