April 19, 2013 – Lenovo Group Ltd., the Chinese personal-computer maker, is the most likely bidder for parts of IBM’s server division, a person familiar with the matter said.

The business, which sells servers running x86 processors to store corporate data and run computing functions, may fetch $2.5 billion to $4.5 billion depending on what assets and liabilities are included, said the person, who asked to not be named because the talks are private. An agreement may still be several weeks away, the person said.

Lenovo, which used the 2005 purchase of IBM’s PC unit as a stepping stone to become the world’s second-largest producer, is diversifying with new products including tablets and smartphones. The company last year allied with EMC Corp. to boost sales of storage equipment and servers that run corporate networks, and buying IBM’s business would further bolster its capabilities, said Alberto Moel, an analyst at Sanford C Bernstein & Co. in Hong Kong.

“Low-cost servers are the fastest-growing, most attractive area of the server business right now, so this would make sense,” Moel. “This is consistent with Lenovo’s strategy of moving into things that are growing and going new places.”

The popularity of cloud computing, the use of software that customers access online instead of storing it on their own servers, is driving demand for low-cost, energy efficient servers from companies ranging from Amazon to Google to Facebook, Moel said.

The server business, a drag on IBM’s results, could be a “good fit” at Lenovo, said Laurence Balter, an analyst at Oracle Investment Research in Fox Island, Washington. The servers’ x86 chips are similar to the processors used in PCs.

“It’s underperforming because of the cost of doing business on IBM’s side,” he said. “Lenovo probably did the calculations and said, ‘Well, we can make more because IBM’s cost of doing business is so much higher.”

Lenovo is now the second-biggest PC maker behind HP. It was the only top-five manufacturer not to see a drop in shipments last quarter, according to research firm IDC.

In response to a story first published at CRN, Lenovo said it was in “preliminary” discussions about a potential acquisition with a third party, which it didn’t name.

“No material terms concerning the potential acquisition have been agreed and the company has not entered into any definitive agreement,” Lenovo said today in the statement.

Lenovo spokesman Jeffrey Shafer said in an e-mail he had no additional comment beyond that statement, when contacted today by Bloomberg News. IBM Chief Financial Officer Mark Loughridge said on the company’s earnings call that he wouldn’t comment on rumors.

Profit at IBM’s low-end service business has been “underperforming” compared with other parts of its hardware unit, the company said in a presentation to investors in February. Revenue for the System X business, which sells the servers, declined 9 percent in the first quarter, IBM said. Even so, the company’s total hardware revenue fell more sharply, dropping 17 percent to $3.1 billion.

The company said it would take “substantial actions” to improve the business. A combination of divestitures, job cuts and acquisitions will result in charges in the second quarter and gains in the second half, Loughridge said.

“The low-end server division was a drag, subtracting economic value from Big Blue,” Balter said. “It is a painful but smart move in the long run.”

Ed Barbini, a spokesman for Armonk, New York-based IBM, declined to comment to Bloomberg News on the Lenovo talks.

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