Report: Lenovo in Talks to Buy IBM Server Unit

IBM xSeries is reportedly in talks with to buy its flagging Series X server unit; a deal that would immediately propel the China-based company into the top echelons of the server market and fundamental reshape the channel competitive landscape.

According to Reuters, no deal is imminent. Talks are reportedly ongoing and will take weeks to months to conclude. Analysts speculate the low-end Series X server unit could fetch IBM between $2.5 billion and $4.5 billion.

Both companies are being relatively tight lipped about the sale. IBM reportedly isn’t happy about shedding its vaunted server unit, as it’s an integral part of many of its software and infrastructure solutions.

On its Q1 conference call Thursday, IBM officials stonewalled direct questions about the reported move – saying it does not comment on “rumors” – but it did hint that it will be doing some wheeling and dealing in the year ahead. “Like all years, we have a number of actions planned to improve the business for the long term, acquiring and divesting businesses and rebalancing our resources,” IBM CFO Mark Loughridge said on the call.

IBM reported a hardware revenue drop of 17 percent year on year to $3.1 billion as total sales fell 5 percent to $23.4 billion. Chief executive Ginni Rometty admitted the vendor has fallen short of its goals. “Looking ahead, in addition to closing those transactions, we expect to benefit from investments we are making in our growth initiatives and from the actions we are taking to improve under-performing parts of the business,” Rometty said.

One of those under-performing parts could be IBM’s server unit, which is under pressure from escalating manufacturing and operating costs that are eroding profitability and dragging down other financial metrics. In other words, Series X are making money – just not enough money. The real issue, analysts say, is IBM’s corporate cost structure that puts too much demand on sales and revenue.

Lenovo, on the other hand, doesn’t have the same cost structure as IBM. Speculation is Lenovo has looked over the IBM business and concluded that it can make money by reducing operating and production costs.

Should a deal come to pass, Lenovo will skyrocket to the top of the server market. IBM is overall global server market leader, with a share of 36.5 percent inclusive of its high-performance and mainframe products. is second with 26.4 percent. is third with 14.8 percent. The entry-level servers that Lenovo would acquire would likely put it somewhere between HP and in the market share pecking order.

Lenovo is aggressively expanding beyond its PC roots. It’s already a smartphone leader in Asia markets. It recently entered into a partnership with to develop new SMB and midmarket server and products. And it’s introducing new tablets and convertible PCs to compete in mobility. Lenovo began is meteoric rise in PCs in 2005, when it bought IBM’s ThinkPad business for $1.2 billion.

In the channel, Lenovo is defying the rest of the market when it comes to PCs. Despite an 8 percent decline in PC sales last year that hit HP and Dell hard, Lenovo continues to grow market share and channel share of voice. It recently introduced new incentives and rebates to partners to stimulate channel sales.

Adding servers to the line card could have an amplifying effect for Lenovo in attached sales. Lenovo partners selling PCs and other goods must turn to other vendors for more advanced business products such as servers. With Series X servers, Lenovo and its partners will be able to expand the average sale and increase stickiness with customers.

The server market is increasingly fluid as more sales shift to hosted services rather than on-premise deployments. The overall server market sales fell 7.2 percent in 2012, which the biggest losses coming out of HP. Dell, which is going through a leveraged buyout, has made overtaking  HP in server sales a top priority. Lenovo entering the market with its strong consumer and commercial PC channel will put even more pressure HP and Dell.

While IBM and it’s partners may not be happy with the loss of entry-level servers, any deal with Lenovo will likely include some cross-selling arrangement to ensure business continuity with existing accounts. And while IBM will likely fall out of the top spot in server market share, it will likely not have an impact on its overall business. Increasingly, IBM is shifting focus to products in , security, storage, cloud management and .

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