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IBM selling x86 server business to Lenovo?

Talks ongoing, likely only System x racks and towers, not FlexSystems

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There are rumors swirling around, again, that IBM is looking to sell off all or a portion of its x86 server business to Chinese PC maker and server partner Lenovo Group.

US channel mag CRN caught wind of something going down between IBM and Lenovo on Thursday and referenced an anonymous source with knowledge of the talks now going on, claiming that Big Blue is looking to sell off its System x business for between $5bn and $6bn.

Another source told CRN that the employees working in IBM's server product engineering facility in Research Triangle Park, North Carolina have been told that they will be Lenovo employees as of June 1.

The Wall Street Journal also quoted an unnamed source saying that some deal was going down to sell the IBM x86 server business to Lenovo.

But in a conference call with Wall Street analysts after the markets closed on Thursday, IBM CFO Mark Loughridge didn't have anything to say about a potential deal with Lenovo or anyone else. "On speculation and rumors, I am obviously not going to comment," Loughridge said.

Other IBMers were unable to comment about the possible deal with El Reg at press time.

Such a move would be a tough one for IBM to make. But with its Systems and Technology Group bleeding red ink to the tune of a $405m pre-tax loss on a combined internal and external revenue of $3.9bn in the first quarter, relatively new CEO Ginni Rometty must be tempted to change something.

With System x rack and tower servers being commodities, much like PCs, and Big Blue wanting to peddle its Power Systems running Linux for big data, database, and other infrastructure and analytics workloads, it could work out that IBM can generate more cash by walking away from the commodity x86 server business.

However, by doing so, IBM loses leverage and volume discounts with chip suppliers Intel and Advanced Micro Devices and operating system suppliers Microsoft, Red Hat, and SUSE Linux. Yet IBM has all but abandoned AMD anyway, so that isn't much of a change, and the Linuxes from both Red Hat and SUSE Linux run on IBM's Power Systems.

Walking away from being the number-three x86 server supplier behind Hewlett-Packard and Dell is a pretty big deal, even if it does give IBM $5bn or $6bn to pay dividends and do share buybacks with. That's because IBM's Power Systems business is crashing along with the rest of the Unix server market, and at the moment its System x rack and tower and BladeCenter blade server businesses are its largest server business, from a revenue perspective.

Most quarters, x86 servers generate more sales than mainframes, the exception being when a new mainframe line ramps up, as happened in the fourth quarter last year.

If IBM actually has a plan that gets it into hyperscale data centers – possibly with ARM, Atom, and Power microservers, possibly deploying some of the Power AS and torus interconnect in the BlueGene/Q supercomputers – and if IBM will use at least some of the funds from a Lenovo deal to do the engineering to make modern servers, then dumping System x might be worth it.

It would be quite interesting, in fact, to see IBM become an ARM licensee and offer both ARM and Power alternatives. But IBM is probably more inclined to think it can push Power into an x86-dominated data center, and do so despite all the hype and real engineering with ARM processors for servers.

What seems very clear is that IBM will not sell off its Flex System modular server designs, which launched last April, but it is possible that it could go to Lenovo at some point to manufacture the machines. Ditto for Power Systems machines, the manufacturing of which for the North American market has just moved out of the historic Rochester, Minnesota plant that was set up in 1969, to Guadalajara, Mexico.

IBM sold off its unprofitable PC business to Lenovo back in December 2004, and the two companies inked a server partnership deal in January 2008 that allowed Lenovo to make one-socket and two-socket rack and tower machines based on IBM's System x designs. Lenovo has since switched to its own designs, and it is a wonder why IBM has not just rebadged the Lenovo machines at this point. That, in the end, may be precisely what Big Blue actually does. ®

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