International Business Machines Corp. reportedly wants to get rid of high-volume mainstream server business unit as server margins are shrinking. The company is currently in talks with Lenovo Group, which acquired IBM’s PC business in 2005, to sell x86 server business unit. The transaction will gain IBM some cash and will boost its overall profit margins, but the company risks leaving the market in several years.
The Wall Street Journal last week reported that IBM is in advanced talks to sell its x86 server business unit to Lenovo Group. The exact terms of the deal are unclear, but it could easily worth several billions of dollars as IBM is one of the leaders of the server market. Even though IBM is considerably behind Dell and Hewlett-Packard in terms of volumes, it has very strong reputation among customers.
While selling-off mainstream server business will boost IBM’s margins, it also means that the company will have to leave the server market in the coming years as the market of proprietary mainframes, where IBM is also very strong, is shrinking. On the other hand, with the rise of micro-servers, IBM would face major challenges from companies like Dell, HP and others.
IBM has a history of belligerently shifting its business mix to areas with healthier progress and higher profit margins. The firm 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. Lenovo has so far initiated its own server business, but has not gained much of the market share.
IBM and Lenovo did not comment on the news-story, but Lenovo admitted in a filing with the Hong Kong stock exchange that it is in talks regarding a major acquisition.
“The board would like to inform the shareholders of the company and potential investors that the company is in preliminary negotiations with a third party in connection with a potential acquisition. As at the date of this announcement, no material terms concerning the potential acquisition have been agreed and the company has not entered into any definitive agreement in relation to the potential acquisition,” the statement reads.