IBM-Lenovo deal likely to focus on low-end, commodity servers, analyst says

IBM may sell off its low-end x86 systems but will likely keep more profitable hardware, an analyst says

Any deal by IBM to sell parts of its server business to Lenovo is likely to focus on low-end commodity x86 hardware, not higher-end x86 systems such as IBM's PureSystems and iDataPlex servers, an industry analyst said Thursday.

IBM reportedly is in talks with Lenovo to sell all or part of its x86 server business. It's unclear how far along the talks are or whether a deal will materialize, but unnamed sources told both CRN and The Wall Street Journal that discussions are under way.

Asked about the talks on IBM's quarterly financial call Thursday, IBM's CFO declined to comment on what he called "rumors." An IBM spokesman also declined to comment.

It could make sense for IBM to off-load its commodity x86 business, where profit margins are relatively low, said Dan Olds, principal analyst at Gabriel Consulting. But he doesn't see IBM selling off all its x86 businesses.

"I can certainly see them getting out of the commodity tower server market, and commodity one- and two-way rackmount servers, but I don't see them getting out of x86 blades or more specialized systems like iDataPlex," Olds said.

Profit margins in those businesses are higher, and IBM has opportunities to sell more "secret sauce," he said, meaning it can differentiate its products from the competition.

IDataPlex is a family of servers that employs an unusual, half-depth server design to minimize cooling costs. They're aimed at big Internet companies or enterprises building large private clouds.

PureSystems, based on both x86 and IBM Power chips, are servers in which hardware and software have been engineered together to perform specific computing tasks, such as data analysis and online transaction processing.

"There's more IBM value-add in those systems," Olds said.

The CRN report said the deal would encompass IBM's tower, rack and blade servers, but Olds thinks IBM would want to retain its blade servers, too. IBM wants US$5 billion to $6 billion from the sale, CRN said.

A deal would appear to make sense from Lenovo's perspective. The company already sells a few server models and formed a new Enterprise Products Group last year in a bid to expand its business in servers, storage and network gear.

If the deal goes ahead, it will be reminiscent of Lenovo's purchase of IBM's PC business for $1.25 billion in 2005. That was seen as a prescient move by IBM, which exited a business where profit margins were declining quickly.

IBM may be motivated to sell parts of its server business for similar reasons. The profits it makes from commodity servers are much lower than those it can get from other areas, such as its middleware, Unix servers and consulting services. Oracle CEO Larry Ellison has also said he has no interest in selling commodity hardware.

But exiting the commodity x86 server market is not such an obvious good move for IBM as exiting the PC market, Olds said. Low-cost x86 servers remain a core part of the infrastructure used in hot markets such as big data analysis and cloud deployments.

Revenue from x86 servers climbed 6 percent in the fourth quarter last year to $9.7 billion, according to figures from IDC. That was the highest quarterly revenue ever recorded for x86 servers, which accounted for two-thirds of all server spending.

While IBM wouldn't comment on any talks with Lenovo, CFO Mark Loughridge did say on IBM's earnings call Thursday that parts of its business are "in transition or have been underperforming." He singled out Power systems, storage products and System x, which is IBM's brand for its x86 systems.

"Here we are going to take substantial actions," he said, without elaborating. He added later that the company has actions planned to improve its long-term performance, including "acquiring and divesting businesses."

James Niccolai covers data centers and general technology news for IDG News Service. Follow James on Twitter at @jniccolai. James's e-mail address is james_niccolai@idg.com

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Tags business issuesserversIBMhardware systemsLenovoLow-end serversMergers and acquisitions

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