Lenovo deal to buy IBM x86 server biz moving along fast

It is becoming increasingly clear that IBM CEO Ginni Rometty is annoyed with the performance of the company's systems business. Annoyed enough to spin off all or part of its System x server business to China's Lenovo Group, according to rumors that surfaced last week.

The US channel trade rag CRN broke the story of an impending x86 server deal between IBM and Lenovo and has anonymous sources that now say the deal is "moving quickly". Also, as El Reg suspected, those sources say Big Blue is keeping control of its BladeCenter blade servers and Flex System modular systems.

One rumor has it that Lenovo will pay between $5bn and $6bn for all or some of the System x business, which generated $5.6bn in sales last year and is a little more than a third of the company's overall $15.6bn in system sales, as reckoned by Gartner.

That is a lot of revenue to walk away from, but many of us suspect that IBM is bleeding hundreds of millions of dollars each quarter peddling commodity onesie and twosie x86 boxes. The company has never been a low-cost manufacturer of anything, so ditching this x86 server business might make tactical financial sense even if it is strategically dubious.

The sources contacted by CRN also say that IBM employees at product engineering and server firmware development labs in the Research Triangle Park, North Carolina labs where its System x machines originate - have been told they will be working for Lenovo starting June 1.

Interestingly, the Flex System modular servers, which are IBM's "UCS Killers" after Cisco Systems freaked Big Blue out in the enterprise data center, are also designed, for the most part, in North Carolina. IBM has been cagey about where the Flex System chassis and server nodes, based on both x86 and Power processors, are manufactured.

It is reasonable to assume that high-end System x servers with four or eight sockets will remain with IBM and perhaps the iDataPlex rack-blade hybrids that were created for hyperscale data centers and HPC workloads. The latter have not exactly taken the market by storm because of their cost and non-standard rack configurations. (To IBM's credit, it tried a non-standard rack design for the iDataPlex that offered better compute density, just as the Open Compute Project championed by Facebook is doing to suit its own needs.)

What about Lenovo?

Lenovo has been growing fast in servers and is eager to compete very aggressively and get more of a hold in United States and Europe. IBM wants access to Chinese states and provinces to peddle Smarter Planet consulting services and the big data platforms that support such efforts. A deal could be a way to grease the skids.

IBM gets out of commodity x86 servers, gets a sweet deal from Lenovo to get the boxes it needs to do Smarter Planet deals or put thousands or tens of thousands of machines in enterprise customer accounts, and everybody wins. Lenovo gets IBM's System x channel and IBM's System x brand and is the number three x86 server maker in the world, snap!, just like that.

Such a deal with Lenovo could set the stage for IBM to transfer manufacturing (and possibly motherboard and chassis design) for its Power Systems line to Lenovo as well.

IBM may want to keep designing its own Power and System z chips, and it may even indulge by upgrading its fab in East Fishkill, New York to 22 nanometers to make the next Power8 and System z13 engines, expected next year. But after that, and given IBM's 2015 Roadmap to get to at least $20 per share in operating earnings per share, it seems unlikely that the company will push into 14 nanometer and down further to 10 nanometer process technology over the following two processor generations.

Each leap costs billions of dollars, which is why all the server vendors who made their own chips have gone to contract foundry partners or are in the process of doing so. (There are not very many left.)

IBM could have played this x86 server racket a bit differently and bought Advanced Micro Devices or etched its own Xeon or Opteron processors. But again, IBM is not a low-cost manufacturer. It produces relatively low volumes and, historically and more importantly, it did its component and system manufacturing in North America and Europe, close to its customers decades ago but also where it was more costly.

With System and Technology Group, which makes IBM's chips, systems, and storage, seeing a 17 per cent drop in the most recent quarter (to $3.11bn and an operating loss of $405m which means the actual loss was much bigger after overhead was heaped on), it was no surprise that Rometty put her chief of strategy, Tom Rosamilia, in charge of STG this week and swapped Rod Adkins into the strategy job.

Considering that Rosamilia has run both Power Systems and System z businesses, it would be unsurprising if he manages the System x spinoff and whatever changes that IBM will be making to its Power Systems, System z, and storage lineup, particularly

It is not clear if Adkins is in the dog house with Rometty because the STG business is losing money thanks to a 7 per cent mainframe sales slip in the first quarter and with Power Systems revenues down 32 per cent, System x down 9 per cent, and storage down 11 per cent. The top brass at IBM know each other for a long time, and Rometty may have just swapped the execs to show the troops and Wall Street she was doing something.

That is a tiny move. But some big ones are very likely on the horizon. ®