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IBM System X, BladeCenter server business up for grabs

IBM System X negotiations with Lenovo are happening though the two parties can't agree on price and it could take some time to reach an agreement.

IBM has shopped around its Intel-based System X and BladeCenter server business to a number of potential buyers the past few months, although the company has had the most extensive talks with Lenovo, according to sources familiar with the talks.

IBM's on-again-off-again negotiations with Lenovo are now back on although the two parties remain "far apart on price" and it could take a while to reach an agreement, according to sources. Lenovo also purchased Big Blue's PC business almost 10 years ago.

Lenovo would be a good choice by IBM, some analysts believe, given the prior relationship between the two companies. One analyst reserved judgment however, saying she would have to see the details once the deal is signed.

"We would like to see what shape the ongoing relationship between the two would take. With so many services and software delivered on the x86 platform across the entire server market, I would think Lenovo would need some sort of favored nation status with IBM for it to work for both parties," said Jean Bozman, research vice president with IDC Corp., a technology analysis firm based in Framingham, Mass. "It's a tough proposition being in that x86 business."

While IBM has yet to directly confirm efforts to sell its Series X line of x86 servers, during a conference call last week reporting its second quarter financials, IBM Chief Financial Officer Mark Loughridge vaguely referred to a "big divestiture" it expected to make by the end of this year, that would likely be put off until next year. Loughridge declined to identify the business IBM might sell, saying only that the company would not force such a deal for the sake of beating some year-end deadline.

During that call last week, IBM reported that its revenues from its System X business were down 11% in the second quarter compared to the same quarter last year. Even worse, revenues from its Power Systems business dove 25% in the quarter compared to the same quarter last year.

The only bright spot for IBM's server hardware business was its System Z mainframe business, which grew 10% in the quarter. Perhaps more importantly, the delivery of System Z computing power, also referred to as MIPS (millions of instructions per second) leaped 23%.

Despite the performance of the Power Systems business this year, IBM is not considering selling off any pieces of it. The profit margins on those systems are much higher than on System X, and they also present more opportunity for IBM to introduce technical innovations.

"You can't innovate on [the System X] platform for very long before Intel just sucks everything into the chip, it is a pure commodity play," said one source close to IBM. "Given the profits margins, it doesn't make sense to keep pumping money into x86 servers just to run SAP instance faster. No thanks."

IDC's Bozman disagrees, noting that IBM has a very broad range of services and software it could pull together from across its many software and services divisions that could be delivered for x86-based servers.

"IBM is a company that is 50% services and 20% to 25% software, with things like analytics, Big Data and cloud they could innovate around the x86 platform, whether those solutions are built by them or someone else," Bozman said.

Some observers believe the deal would benefit both parties because it plays to their respective strengths.

"[IBM doesn't] have the cost structure nor the stomach to play in such a fiercely competitive space. And they don't have the PC business you need to drive the volumes you need to get competitive component pricing," said Andrew Feldman, general manager and corporate vice president of AMD's Server Business Unit. "This could turn out to be an extremely successful move for both sides."

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