Lenovo Buying IBM's x86 Server Biz Would Be Good for Both

Such a deal, which echoes Lenovo's purchase of IBM's PC unit, would boost Lenovo's server ambitions while divesting IBM of a weakening business.

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.

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 April 19 that the two companies are in private talks about a deal that reaches as high as $2.5 billion to $4.5 billion.

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 April 19 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."

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 April 18.

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, 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 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.