IBM Partners Cheer Potential Sale Of x86 Server Business

Mark Loughridge of IBM

IBM solution providers are applauding the potential sale of the computer giant's low-end x86 based System x server line to Lenovo.

The potential sale of a "low-margin" System x server line would be positive for both IBM and its partners, said David Stone, vice president of business development at Solutions-II, a Littleton, Colo.-based IBM partner.

"The IBM channel is more value-oriented," said Stone, noting that rumors of a possible sale of IBM's x86-based server business have been circulating for the past 45 days. "Volume players will move to the Lenovo level. Value players will move to [IBM] PureFlex."

CRN Thursday reported that IBM is in active negotiations to sell its x86-based server business, with Lenovo emerging as the front-runner to buy the business.

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Responding to a CRN report that Lenovo has emerged as the top candidate to buy IBM's x86 server hardware business, Lenovo Chairman and CEO Yang Yuanqing said the China-based computer giant is in "preliminary negotiations with a third party in connection with a potential acquisition."

Aaron Rakers, an analyst with Stifel Nicolaus Equity Research, wrote in response to IBM's first-quarter 2013 results and the CRN report of a possible IBM-Lenovo deal that a "sale of IBM's x86 server division would certainly be viewed as an indication that the industry is rapidly evolving toward margin compression."

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

IBM CFO Mark Loughridge Thursday declined to comment on the CRN report when asked about it by a financial analyst on the company's first-quarter earnings call.

Loughridge, however, confirmed the divestiture of poorly performing businesses is planned for the current quarter.

"There are parts of our business that are in transition or have been underperforming, like elements of our Power, [System] x and storage product lines that showed disappointing performance in the first quarter," Loughridge said. "Here we're going to take substantial actions," he said, without offering details.

IBM Thursday reported that total systems revenue for its first fiscal quarter of 2013 dropped 13 percent, after adjusting for currency.

NEXT: IBM Server Sales Down, But Numbers Aren't Everything

Of that, IBM's System x revenue fell 9 percent over last year, compared with a 32 percent drop in Power systems revenue and a 7 percent rise in System z mainframe revenue, IBM reported. System storage revenue dropped 11 percent over last year.

The drop in System x server sales is part of a long-term trend for IBM. Research firm Gartner estimated that IBM's x86-based server shipments fell 8.4 percent in 2012 compared with 2011, equating to a drop in x86-based server revenue of 3.5 percent. That was the worst performance of the top five server vendors and was much lower than the industry as a whole, which saw an overall rise in server sales.

The fourth quarter of 2012 was even worse, with IBM's x86-based server shipments down 12.8 percent while revenue was down 2.4 percent, Gartner reported.

However, those numbers don't tell the entire IBM server story.

First of all, IBM continues to have a very strong blade server business. IDC estimated that IBM had a 21.7 percent share of the blade server revenue in the fourth quarter of 2012, second only to that of Hewlett-Packard. The blade server business during the fourth quarter rose 3.3 percent over the same period last year compared with a 3.2 percent rise in the overall server business, although overall x86 server business rose 6.0 percent during that time.

Furthermore, IBM is basing part of its data center infrastructure plans on its PureFlex System converged infrastructure solutions based in part on its Flex System x86 blade server technology.

Todd Swank, senior director of product marketing at Equus Computer Systems, a Minneapolis-based system builder, said that an IBM-Lenovo deal would boost Lenovo's market momentum.

"A lot of custom systems companies are moving to reselling Lenovo," Swank said. "A deal with IBM would give Lenovo an excellent product line they could then combine with their low-cost manufacturing advantage. If you are a Lenovo reseller, it's good news. If not, it will be more tough down the road."

An IBM-Lenovo deal likely would have a major negative impact on the other top server vendors, particularly on HP, currently the top x86-based server vendor, and Dell, which is the second-largest vendor, according to solution providers.

Lenovo has used its low-cost manufacturing capabilities to expand its desktop and mobile PC business in the wake of acquiring that business from IBM to move from a third-tier, China-focused PC maker to second place behind HP, which is seeing its PC business quickly fall, IDC reported earlier this month.

HP, in dismissing calls to sell its own PC business, has long maintained that supply chain synergies between the PC and server business help reduce the cost of sourcing components for manufacturing such systems. Such supply chain efficiencies could help Lenovo cut the cost of manufacturing x86-based servers, making it more competitive vis-a-vis HP and Dell.

Lenovo already is using price to build up its North American channel. Lenovo this week caught the ears of attendees at the Synnex Varnex conference by saying VARs could purchase one ThinkServer RD630 for $299, more than 90 percent off the suggested retail price.

NEXT: Could Government And EMC Hurt The Deal?

Another factor in determining the potential impact of an IBM-Lenovo deal is how much of the IBM x86 server business remains in the U.S., said Andy Kretzer, director of sales and marketing at Bold Data Technology, a Fremont, Calif.-based system builder.

The U.S. government has been adding a requirement to its RFQs (requests for quotes) that anything sold on a GSA schedule be compliant with the Trade Agreements Act, which specifies that products must be manufactured in a country specifically listed on the TAA Designated Country List. China is not on that list.

"If Lenovo moves products to Asia, it's good news for us," Kretzer said.

There is precedence for such a sale.

IBM in 2004 sold its desktop and mobile PC business to Lenovo, which helped IBM exit that low-margin business and helped build Lenovo into one of the world's largest PC manufacturers and a close partner of IBM.

IBM in 2008 followed that up with a deal to license its one-socket and two-socket x86 server technology to Lenovo. Even so, Lenovo remains a second-tier server vendor, with the vast majority of server sales in China and relatively few sales in North America.

For Lenovo, such a deal would be the second major server technology deal in the past year. EMC, which bases its storage hardware on x86-based server platforms, licensed its server technology to Lenovo for the purpose of using Lenovo servers as the new basis for its storage products.

However, that EMC-Lenovo deal could be a stumbling block between IBM and Lenovo. As CRN reported Thursday, IBM views Lenovo as a good buyer for its x86 server business because it does not view Lenovo as a threat to other parts of its business, including storage and converged infrastructure. EMC, in combination with Lenovo servers, is on the other hand a potential threat to IBM's storage business.