Lenovo is buying IBM's low-end servers -- and its customers

Besides IBM's commodity server division, Lenovo wants Big Blue's client roster as a way to develop its own low-end business services division

After IBM sold its PC division to Lenovo back in 2005, it seemed likely IBM would also in time shed itself of its only marginally profitable commodity x86 server division. Now IBM's done just that by selling its x86 server division to Lenovo as well, a move long rumored to be in the works.

But this $2.3 billion sale isn't merely about Lenovo trying to find new markets and profitability in commodity hardware. With it, Lenovo could in time become an IBM -- a sales-and-software juggernaut -- with IBM's current customers as a starting point.

On the face of it, Lenovo ought to be able to wring decent profits out of a server business, and not just because the profit margins for servers are consistently fatter than they are for the desktops. Lenovo has shown it can eke out good results in a bad market: It's one of the few PC makers to see an increase in sales across the course of 2013, even while the PC market as a whole has crumbled.

Lenovo's made fairly major hay from IBM's PC business, thanks not only to expanded sales outside of Asia, but also doing smart things like keeping Windows 7 widely available on its device lineup. But the x86 server market demands a different set of tactics than the desktop.

What might well work to Lenovo's advantage, though, is how this sale will give it access to a whole swath of IBM's existing client base. Such was the hypothesis cited by analyst Tony Yang at BOCI Research in Hong Kong, in a Bloomberg piece about the sale. His conceit is that "the service business will be Lenovo’s major driver in the future" -- in other words, Lenovo is setting itself up to evolve into what IBM is now: a services-and-software company with hardware as a shrinking part of the overall picture.

Also, while IBM was happy to divest itself of its commodity x86 server business, it isn't about to give up its blade servers, let alone its high-end x86, Power, or mainframe offerings. IBM would be well-served to keep them all close to the chest -- not just because of the technology portfolio they represent, but also because of the lucrative vertical customer base and support contracts that goes with them.

Lenovo can't beef up IBM's commodity x86 server business overnight, but if Yang's insights are correct, it may not have to. There might well be secret sauces that Lenovo adds to IBM's low-end server lineup in the same way Lenovo kept the ThinkPad brand alive and well by edging it into tablet and convertible territory. But ultimately Lenovo's new server business may simply function as one piece of a larger services-oriented puzzle that Lenovo is putting together over time.

Another such piece, one that Lenovo has yet to act on decisively, is mobile. Lenovo has flirted distantly with mobile, in part by offering no-contract, pay-as-you-go cell service for some of its ThinkPad devices (albeit through a partner, Macheen), but it clearly wants a more central piece of the business mobile market, as it allegedly did with BlackBerry. Maybe the also-beleaguered HTC would be an easier buy -- perhaps not the most business-centric mobile device maker, but also one less likely to spark a row about security.

First things first, though: Lenovo needs to show how this acquisition is going to be worth the trouble -- which its shareholders are no doubt going to be thirsting to hear more about.

This story, "Lenovo is buying IBM's low-end servers -- and its customers," was originally published at InfoWorld.com. Get the first word on what the important tech news really means with the InfoWorld Tech Watch blog. For the latest developments in business technology news, follow InfoWorld.com on Twitter.

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