Lenovo looks set to buy IBM’s x86 server business

Computing giant IBM is apparently set to sell part of the server side of its business to Chinese PC manufacturer Lenovo.

According to the Wall Street Journal, the Silicon Valley pioneer will be selling off its so-called x86 server business in a deal expected to be worth billions of dollars.

While IBM doesn’t provide a breakdown of how much this aspect of the business generates in its financial reports, Morgan Stanley estimates that the x86 division produced around US$4.9-billion of the company’s US$15.4-billion in server sales last year.

News of the talks reportedly surfaced in the wake of IBM announcing a poor quarter, which resulted in a 4.9% drop in its share price in after hours trading.

For its part, Lenovo told the Hong Kong Stock Exchange that it was in talks with a “third party in connection with a potential acquisition.” It added however that it had not reached any agreements.

As the journal notes, IBM selling the division to Lenovo would represent as a big a change in the computing market as its decision to sell its PC business (also to Lenovo) was in 2004.

The X86 server business was once a lucrative and powerful technology that have also helped companies like Hewlett Packard and Dell make billions of dollars every year.

In the past few years, IBM has fallen behind its competitors in one of computing’s highest volume but lowest profit sectors. A recent Gartner report ranked it at third place in the market. 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%.

IBM has seldom been afraid to shift away from areas of its business it reckons might start becoming unprofitable. Over the past few years, it’s been beefing up its operations in higher margin software and consulting businesses.

At this stage, it’s unclear how far along negotiations might be.