Lenovo Back in Talks for IBM's x86 Server Business: Reports

By Jeffrey Burt  |  Posted 2014-01-21

Lenovo Back in Talks for IBM's x86 Server Business: Reports

Lenovo reportedly is back in negotiations to buy IBM's low-end x86 server business, a move that would give the PC maker's data center ambitions a boost while enabling Big Blue to shed another low-margin commodity business as it looks to focus more of its efforts on software and services.

Talks between the two vendors reportedly broke off last year after a disagreement on the value of the IBM business, but recent financial numbers indicating the hardware business becoming a larger drag on IBM's bottom line may be compelling the larger company to return to the negotiating table. Some reports indicate IBM also may be talking to newly-private Dell.

A deal between Lenovo and IBM could be signed within weeks, an unnamed source told Bloomberg.

Spokespeople for both IBM and Lenovo said the companies do not comment on speculation.

However, in a notice sent Jan. 21 to the Hong Kong Stock Exchange, Lenovo Chairman and CEO Yang Yuanqing noted that his company is in "preliminary negotiations with a third party in connection with a potential acquisition," though he added that no deal had been agreed upon. He said the notice came after Lenovo's Board of Directors "noted certain articles published in the internet in relation to a possible acquisition by the Company of certain computer server business."

A deal on the server business would echo a similar one nine years ago in which Lenovo bought IBM's PC division for $1.25 billion. At the time, IBM officials said the PC business was becoming increasingly commoditized and that the company wanted a way out. Lenovo was the top PC maker in China, but had little presence outside of that country.

Now in 2014, Lenovo is the top vendor in a worldwide PC market that has seen overall sales decline over the past couple of years, putting a hurt on such system vendors and component makers as Hewlett-Packard, Dell, Intel and Advanced Micro Devices. The slowdown in PC sales has come as the popularity of mobile devices like smartphones and tablets has skyrocketed.

Lenovo is looking to diversity its portfolio and expand into the data center. The company has sold servers in China for more than 17 years, but over the past couple of years has begun to push into other markets, including North America. In 2012, Lenovo established the Enterprise Systems Group for its North American push, and is still ramping up the business, Michael Kendall, director of product marketing at Lenovo, told eWEEK during the Intel Developer Forum in September 2013.

Lenovo was at the show to unveil two new tower servers and to introduce an upcoming two-socket ThinkServer system powered by Intel's newest Xeon E5-2600 v2 chips.

Lenovo also wants to grow its storage business, leveraging a partnership with EMC that led to the creation of a new company, LenovoEMC, which launched in January 2013.

Lenovo Back in Talks for IBM's x86 Server Business: Reports

For IBM, getting rid of the x86 server unit would be only the latest step in an effort to shed low-margin hardware businesses—such as PCs and printers—and focus on software and services. New technology trends like virtualization and the growing migration of workloads to the cloud have put pressure on sales of x86 servers. In October, IBM officials said the company's Systems and Technology unit saw revenue decline 17 percent in the third quarter 2013, with 7 percent growth in System z mainframes being offset by declines in Power (37 percent) and x86-based System x (16 percent) servers and storage (10 percent).

At the same time, business units around business analytics, cloud and Smarter Planet all saw strong revenue growth, the officials said.

According to reports, talks last year between Lenovo and IBM broke off after Lenovo officials put the valuation of IBM's x86 server business at less than $2.5 billion. There is no indication at what level Lenovo is putting the business at now. IBM doesn't detail revenues for the System x business, though third-quarter revenue for the entire Systems and Technology unit came in at $3.2 billion in the third quarter.

At the time, analysts said a deal between IBM and Lenovo would make sense for both. Forrester Research analyst Richard Fichera said in a blog post that "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. 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."

IBM on Jan. 16 announced the latest iteration of its X-Architecture for System x and PureSystem servers. The new X6 architecture includes integrated eXFlash flash storage for enhanced performance, a modular design and improved resiliency for better uptime.

IDC and Gartner analysts in the third quarter both put IBM at number two in worldwide server revenues, behind HP and ahead of Dell. In server shipments, IBM was number three behind HP and Dell, Gartner said.

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