International Business Machines Corp. (IBM) is looking to part
ways with the servers that have powered much of the Internet.
The company is in advanced discussions to sell its x86 server
business to China's Lenovo Group Ltd. (LNVGY, 0992.HK), people
familiar with the matter said.
An exact sale price wasn't known, but one of the people said a
deal, if one is struck, could be worth billions of dollars.
IBM doesn't break out server revenue, but Morgan Stanley
estimates the x86 server business generated about $4.9 billion of
the company's $15.4 billion in server sales last year.
News of the talks surfaced as IBM reported a disappointing
quarter, with particularly weak hardware sales. IBM's shares
dropped 4.9% in after-hours trading on Thursday.
As when IBM announced plans to sell its personal computer
business in 2004--also to Lenovo--a sale would signal a sea change
in the computing market.
The x86 servers were once a fast-growing and lucrative
technology that lifted sales at companies like Hewlett-Packard Co.
(HPQ) and Dell Inc. (DELL), which still rely on them for billions
of dollars in sales.
IBM, having struggled to compete with those companies, now may
stop selling a product that produces the server market's highest
volumes but lowest profit, according to industry analysts.
In 2012, IBM was the No. 3 player in the low-end server market
after H-P and Dell, according to technology research firm Gartner.
IBM ended the year with 15% of the market by revenue, down from
16.4% in 2011, according to Gartner. Meanwhile, H-P's share fell to
32.4% from 35%, and Dell's slipped to 21.4% from 21.8%.
Dell said it has seen strong growth in x86 servers. A spokesman
for H-P declined to comment.
It wasn't clear how advanced IBM's talks with Lenovo were or
whether a deal would materialize. Technology trade publication CRN
reported the talks earlier Thursday.
IBM has a history of aggressively shifting its business mix to
areas with better growth and higher profit margins. The company
shocked the technology industry when it agreed to sell off its PC
business to Lenovo before personal computers had been largely
commoditized. IBM then beefed up its operations in higher margin
software and consulting businesses.
A sale of the low-end part of the server business would fit this
pattern, as new Chief Executive Virginia "Ginni" Rometty looks for
ways to expand the company's revenue and earnings. A divestiture of
the x86 business would mark Ms. Rometty's first major asset sale
since taking over the top job a year ago.
IBM is likely to hold on to the higher-end parts of its server
business where it can generate a competitive advantage. IBM invests
billions of dollars in research and development to help fuel the
development of its mainframe computer business, where it remains
the industry's dominant player. The company makes the computer
chips, operating system and much of the infrastructure software
that powers those machines.
News of a possible sale came as IBM ran into trouble in the
first quarter of 2013. The company said its profit fell 1% to $3.03
billion as its revenue dropped 5% to $23.41 billion.
The computer hardware business was a particular area of
weakness. Total revenue for hardware systems declined 13% in the
first quarter, and the business reported a pretax loss of $405
million. While sales of mainframes rose 7%, sales of IBM's x86
products--"System x"--fell 9%.
The market for x86 servers, named for the chip design used by
Intel Corp. (INTC) and Advanced Micro Devices Inc. (AMD), grew
quickly in the 1990s as the Internet took off. But technologies
like "virtualization" let users squeeze more power out of fewer
machines.
Moreover, some high-growth Internet companies like Google Inc.
(GOOG), which in the past would typically have purchased large
numbers of x86 servers to power websites, now make their own,
hurting the growth potential of the market.
-Ian Sherr contributed to this article.
Write to Spencer E. Ante and Sharon Terlep at
spencer.ante@wsj.com and sharon.terlep@wsj.com
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