IBM In Talks To Sell x86 Server Business To Lenovo

IBM is in active negotiations to sell its x86 server hardware business, and Lenovo has emerged as the top candidate to buy it, multiple sources with knowledge of the situation told CRN this week.

Lenovo is currently the only company in negotiations to purchase IBM's x86 server business, according to one high-ranking industry executive tracking the deal, who spoke on condition of anonymity.

The deal would encompass IBM's System x line, which includes Intel- and AMD-based tower, rack and blade servers. IBM is reportedly seeking $5 billion to $6 billion for its x86 server business, the executive said.

Lenovo emerged as a desirable candidate because IBM is only interested in selling its x86 server business to companies it doesn't view as a threat to other parts of its business, the executive said. Lenovo fits that bill since it doesn't have storage, networking or converged infrastructure in-house, nor does it have much of a footprint in the data center, the source said.

[Related: Lenovo Eyes More Server Growth Through VARs ]

IBM also has informed employees in its 20,000-square-foot server product engineering (PE) lab, located in its massive Building 201 facility in Research Triangle Park, N.C., that they will become Lenovo employees effective June 1, a separate source with knowledge of the matter told CRN.

Lenovo's North America headquarters is located in Morrisville, N.C., about five miles from Research Triangle Park.

IBM, which will report first-quarter earnings for fiscal 2013 Thursday afternoon, didn't respond to a request for comment. A Lenovo spokesperson declined comment, citing the company's policy of not responding to rumors or speculation.

IBM's PE lab, which supports all of the vendor's server lines, including the System x, System i, System p and System z, is where hardware and software engineers re-create customer problems in order to solve issues that can't be handled by IBM's Tier 1 to Tier 3 IBM support teams, the source told CRN.

IBM plans to continue providing high-margin server services, and once it sells the System x line it will focus on configuring, testing, installing and managing solutions, but not manufacturing the hardware product components, the source said.

System x sales declined 3.7 percent overall in IBM's fiscal 2012 -- 2.7 percent when adjusted for currency fluctuations. Overall, IBM's Systems and Technology sales were down 7 percent to $17.7 billion in fiscal 2012.

IBM is looking to decrease its focus on hardware as part of its Roadmap 2015 (a plan some employees have branded "Roadkill 2015"), first announced in 2010 by then-CEO Sam Palmisano. The plan calls for boosting earnings per share to $20 and growing revenue in cloud, analytics and Smarter Planet solutions.

IBM has cut staff and is expected to shed some business lines as part of the overhaul that Roadmap 2015 represents, one source close to IBM told CRN. "People have been expecting some kind of sell-off," said the source.

NEXT: Lenovo's Server Vision Quest

Lenovo is looking to grow its server portfolio to take on x86-based server vendors and in May launched its RD530 and RD630 ThinkServers, which it called its first "enterprise-ready" servers. Lenovo also said its server revenue through the channel grew 76 percent from fiscal 2012 to fiscal 2013.

An executive from an international solution provider that works with both companies expects the deal to benefit server-focused partners. "I think this could be a positive for the channel, since Lenovo does a larger percentage of its business through the channel than IBM," said the source.

According to IDC figures released in March, the x86 server market saw a notable uptick in revenue during the fourth quarter of 2012 due to growing demand for Intel's Sandy Bridge processor. IBM was the top global server vendor by revenue during the fourth quarter with 36 percent share of the market, followed by Hewlett-Packard with 25 percent and Dell with 15 percent, according to IDC's figures.

The IBM-Lenovo server deal could impact the Lenovo-EMC partnership formed last August, due to the frosty relationship between IBM and EMC, sources told CRN. EMC is embedding Lenovo's enterprise server offerings into some of its storage systems, and Lenovo is reselling EMC's networked storage solutions to customers in China. Lenovo also paid an unspecified amount to acquire partial ownership of EMC's Iomega division.

Rumors of IBM selling its x86 server business to Lenovo have been simmering for years. In early 2008, the vendors inked an agreement that allowed Lenovo to build one-processor and two-processor servers based on IBM System x server technology. Lenovo had been selling its own x86 servers in China prior to the IBM partnership.

In early 2009, amid mounting rumors of IBM exiting the server business, one of the company's executives tried to quell the speculation. "Let me be clear ... IBM is not exiting or selling its x86 server business," Adalio Sanchez, general manager for System x in IBM's Systems and Technology group, said in a memo to IBM partners.

IBM sold its PC business to Lenovo in 2004 for $1.25 billion and took an 18.9 percent stake in the China-based vendor. In that deal, IBM became Lenovo's primary services and customer financing provider, and Lenovo became the preferred supplier of PCs to IBM.

At the time, IBM agreed to let Lenovo continue using the IBM brand on ThinkPads for several years, but Lenovo switched to its own branding in 2007.

IBM is holding its Edge 2013 conference in Las Vegas from June 10-14, and one of the sessions will feature information about the "latest IBM Storage, System x and PureSystems product enhancements," according to a session description on the event website.

PUBLISHED APRIL 18, 2013