Advanced Computing in the Age of AI | Tuesday, June 28, 2022

IBM Again Rumored To Be Selling Off X86 Server Business 

The rumors have started up again that IBM is getting ready to leave the X86 server business, with Dell and Fujitsu being mentioned as possible suitors.

With the large hyperscale customers like Google, Amazon, and Facebook making their own systems and comprising roughly a quarter of server volumes these days, you can't blame Big Blue for wanting to exit a low-margin business that is getting worse by the year. Particularly when it looks like IBM is actually losing money on its roughly $4.5 billion X86 server business. (IBM does not break out its revenues and pre-tax income and losses by product line, but the X86 business is probably the culprit behind losses in the Systems and Technology Group in several quarters over the past two years.)

Last April, rumors were swirling that IBM was negotiating to sell all or part of its X86 server business, which includes rack, tower, blade, and converged systems with various brands on them, to Chinese server maker Lenovo Group. The rumors said that IBM wanted somewhere between $5 billion and $6 billion for the business, but Lenovo reportedly only thought it was worth half of that. IBM has a vast partner network pushing its machines and is the number three X86 server shipper, behind Hewlett-Packard and Dell, thanks to both its channel and its direct sales team, which caters to the top several thousand accounts worldwide. Anyone smaller than IBM that buys the System x server business is automatically a player – much as was the case when Lenovo bought IBM's PC business, also not profitable when the deal went down in December 2004. Lenovo and IBM have had a server partnership since early 2008, with Lenovo rebadging entry one-socket and two-socket machines designed by IBM.

The latest rumors about IBM trying to offload its X86 server business, first reported in the Wall Street Journal, say that Dell is one of the parties that has looked at acquiring the business. There are other rumors going around that Fujitsu might also be interested. An IBM spokesperson tells EnterpriseTech that the company "does not comment on speculation and rumor," and a Dell spokesperson said exactly the same thing. Fujitsu did not comment at press time but would no doubt have the same canned response.

Dell just went private in November last year after a $25 billion leveraged buyout by company founder Michael Dell and venture capitalist Silver Lake Partners, backed by a bunch of big banks and Microsoft. The company is free to do with its cash as it sees fit without any worry of ramifications from Wall Street. Dell has been buying PC market share for more than the past year with very aggressive pricing, and it may be interested in buying server market share in one fell swoop rather than one deal at a time.

If Dell did buy IBM's X86 business, the company would leapfrog over archrival Hewlett-Packard. In the third quarter of 2013, which is the most recent quarter for which data is available, IBM's System x business (including BladeCenter blade servers and PureSystem converged systems with X86 nodes) accounted for $1.17 billion, down 17.6 percent, against shipments of 185,634 shipments, down 29.8 percent. (These are figures from Gartner.) The persistent rumors that IBM was trying to sell off the X86 server business have not helped. HP sold 664,891 ProLiant machines based on X86 processors, up 5.7 percent, and booked revenues of $3.09 billion, up 8.7 percent. The combination of Dell and IBM would account for a total of $3.2 billion in revenues in the quarter, but down 9.2 percent, with a total of 670,241 machines, off 19.2 percent.

This is reminiscent of the combination of HP and Compaq back in 2001. At the time, when HP shelled out $25 billion to buy the dominant PC and X86 server shipper, HP was set up to be the largest system and storage vendor on the planet. But then the dot-com bubble burst and the global economy went into a recession, and since that time HP and IBM have been neck-and-neck for the revenue lead in systems rather than HP being far ahead as it looked like it would be. Only in the past year, when IBM stopped gaining market share on rivals HP and Oracle in the RISC/Unix business and started declining in step with that overall market, has HP been able to pull ahead of Big Blue in terms of total revenues for systems across all architectures. IBM has never shipped more systems than the HP-Compaq combination, and even if it does not sell off its X86 systems business to Dell, Fujitsu, or Lenovo, it never will. The gap is just too large and is getting larger as HP and Dell slug it out.

It is difficult to see why Fujitsu would acquire IBM's System x business, presumably for billions of dollars. Having a larger systems business has been a goal for the Japanese company, and that is one of the reasons it tied up with German systems maker Siemens a decade and a half ago and took over the Fujitsu-Siemens partnership completely a few years back. But even with that, Fujitsu's X86 systems business is one-tenth the size of HP's. While Fujitsu makes widely respected Sparc64 systems that run Solaris or Linux and powerful derivatives of these aimed at supercomputing centers, these are relatively tiny businesses that only generate tens of millions of dollars per quarter unless there is a big supercomputer deal in Japan that gets done. That said, if Fujitsu wants to expand globally and get a footprint in North America, this would be one way to accomplish that goal.

The one thing IBM has not done is backed off on research and development in the X86 server business. It launched the NextScale hyperscale machines for cloud and high performance computing workloads last September, and was previewing its upcoming System X6 high-end systems, based on Intel's forthcoming Xeon E7 v2 processors, last week. It could turn out that these product lines remain with IBM, as well as its PureSystems converged systems.

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