Lenovo In Acquisition Talks For IBM Server Biz – Report

IBM could be preparing to sell off its commodity System x x86 server business to Lenovo, according to some reports.

Lenovo’s acquisition of IBM’s PC business in 2005 proved a boon for both companies. IBM was able to shed a commodity business a few years before the PC market began to slide and invest the money in areas – from software to services to servers – that yielded higher margins.

Strategic Move

For its part, Lenovo went from being a top vendor in China to becoming the second-largest PC maker in the world, behind only Hewlett-Packard after overtaking Dell. The company is also expanding into tablets and smartphones.

Now Lenovo and IBM reportedly are talking about the PC maker buying Big Blue’s commodity System x x86 server business, a move that could bring billions of dollars into IBM’s coffers and rapidly move Lenovo up the server vendor lists. Bloomberg, quoting an unnamed “person familiar with the matter,” reported 19 April that the two companies are in private talks about a deal that reaches as high as $2.5 billion (£1.6bn) to $4.5 billion (£2.9bn).

Neither company is talking to reporters about the report, which said the deal could be several weeks away from being completed.

Such a deal would make sense, much in the way that Lenovo’s purchase of IBM’s PC business did, according to Forrester Research analyst Richard Fichera.

“IBM sold its PC business to Lenovo to the tune of popular disbelief and dire predictions, and it’s doing very well today because it transferred its investments and focus to higher-margin business, like servers and services,” Fichera wrote in an 19 April post on the Forrester blog. “Lenovo makes low-end servers today that it bootstrapped with IBM-licensed technology, and IBM is finding it very hard to compete with Lenovo and other low-cost providers.”

He speculated that margins on the low-cost servers dropped to a point that convinced IBM executives that it was time to get rid of that part of the server business and invest that money elsewhere, probably software and services, particularly around mobile and cloud integration. Fichera predicted that, should the deal go through, IBM will sell “its conventional rack and tower server business. It will probably reserve its new Flex Systems line, iDataPlex and their HPC [high-performance computing] business and any fabric/connectivity IP it has.”

Server Struggles?

IBM has been expanding its hardware offerings to include such systems as iDataPlex for Web 2.0 companies and high-performance computing environments and tightly integrated PureSystems for such workloads as databases and big data. It also offers a range of high-end Unix servers running on its Power processors and its System z mainframe systems.

Bloomberg reported that IBM officials told investors in February that the System x unit was not doing as well as other parts of the hardware unit, and that they would make moves to improve it. System x revenue in the first quarter fell 9 percent, IBM officials said 18 April.

IBM continues to top the global server market in revenue; in the fourth quarter of 2012, the company grew server revenue 8.9 percent to almost $5.1 billion (£3.3bn), giving it 34.9 percent of the market, ahead of Hewlett-Packard, which had 24.8 percent, Gartner analysts said in February. IBM was third in shipments during the quarter, behind HP and Dell. The overall x86 server market – comprising systems running on x86 chips from Intel and Advanced Micro Devices – saw strong revenue growth in the quarter, according to IDC analysts. Revenue jumped 6 percent, to $9.7 billion (£6.4bn) worldwide, even though shipments fell 3.7 percent. IBM’s x86 server revenue dropped 2.3 percent from the same period in 2011, compared with revenue increases by HP and Dell.

Forrester’s Fichera said IBM may be looking to get out of the low-end x86 server space in anticipation of continue margin declines. That area of the server market is getting increasingly crowded. Not only does IBM have to compete with HP and Dell, but also now with the likes of Cisco Systems and Lenovo, as well as original design manufacturers and Web 2.0 companies, such as Google, that will make their own servers to meet their individual performance and power needs.

Changing Market

The growth of Web 2.0 companies – including Google, Microsoft, Amazon and Facebook – and such trends as cloud computing and mobility are driving demand for servers that are high-performing, highly energy-efficient and low-cost.

Lenovo has been looking to grow its server business, and last year unveiled a number of low-end ThinkServer systems. Also last year, the company entered into a deal with storage giant EMC to develop new x86 server products, displacing Dell as EMC’s partner. The two companies officially launched LenovoEMC in January.

Buying IBM’s x86 server business would greatly expand Lenovo’s customer base. According to Fichera, it also would expand Lenovo’s server reach into markets like North America and Europe, something rival Chinese vendor Huawei Technologies has been unable to do.

According to an 18 April report by CRN quoting multiple unnamed sources, IBM is looking to sell its x86 blade, rack and tower systems to a vendor that wouldn’t compete with it in other areas of its business, and that Lenovo – which doesn’t have storage or networking businesses – is the only company in negotiations.

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Originally published on eWeek.