IBM Server Talks With Lenovo Halted Over Price Row

Talks between Lenovo and IBM over a possible sale of the latter’s commodity System x86 server business have broken down, and the culprit seems to have been the price.

This comes after reports suggested last month that IBM and Lenovo were holding active discussions over selling Big Blue’s System x86 server business to Lenovo, in a deal said to worth between $2.5 billion (£1.6bn) and $4.5 billion (£2.9bn).

IBM and Lenovo can’t agree

Lenovo successfully acquired IBM’s PC business back in 2005, a move that proved a boon for both companies.

For IBM, it meant it was able to shed a business a few years before the PC market as a whole began to slide. The move also freed it up to invest in other areas that yielded higher margins, such as the server and services sectors.

And that PC deal was also good for Lenovo, as it went from being a top PC maker in China to become the second-largest PC maker in the world, behind only Hewlett-Packard after overtaking Dell.

And it seemed a similar move was likely for Big Blue’s x86 server business, as it would have rapidly grown Lenovo’s enterprise server offerings, an area the Chinese company is keen to grow. It would have also greatly expanded Lenovo’s customer base, and extended its server reach into markets like North America and Europe.

For IBM, the attraction of offloading its x86 server unit would have been to remove a unit where it is competing against a growing number of rivals such as Dell, Hewlett-Packard and even Cisco Systems. It would have also potentially freed up billions of dollars for IBM’s coffers.

Valuation disagreement

But the talks have broken down, and the sticking point is the price.

Despite weeks of negotiations, there was apparently a “huge gap” regarding the value of IBM’s x86 server unit, according to the Wall Street Journal, which quoted a person familiar with the matter.

Lenovo had apparently placed a value of below $2.5bn (£1.6bn) on the IBM unit, the source claimed.

“In terms of sitting around the table and working through the nuts and bolts of the transaction, that’s not happening right now,” the source said.

It is not known exactly what valuation IBM had placed on its commodity x86 server business, and Big Blue does not break down revenue for the server unit. However, Morgan Stanley reportedly estimates the x86 server business generated about $4.9 billion (£3.2bn) of IBM’s $15.4 billion (£9.9bn) in server sales last year.

It remains to be seen whether the talks have – in reality – broken down completely, as neither company is publicly commenting on the issue.

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