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IBM's Server Sale Would Be a Smart Move

Stocks in this article: IBM

NEW YORK (TheStreet) -- Rumors are swirling that IBM (IBM) is looking to sell off its low-end server business as the tech giant continues to target higher-margin areas.

Citing people familiar with the matter, The Wall Street Journal reported that IBM is trying to sell its x86 server operation, with Dell looking at the business. Another source said that Chinese tech heavyweight Lenovo could be a potential purchaser.

An IBM spokesman told TheStreet the company doesn't comment on rumor and speculation. Lenovo also declined to comment. Dell has not yet responded to TheStreet's request for comment.

Nonetheless, a sale of the IBM's server business could make sense for the Armonk, N.Y.-based firm, which has spent recent years shifting its corporate focus away from hardware onto high-margin software and services.

IBM's lower-end commodity hardware, in particular, has been feeling the strain. During the company's fiscal third-quarter, for example, revenue from System x x86 servers fell 18% compared to the same period last year. In contrast, the company's high-end System z mainframe sales increased 6%.

The weakness in System x revenue was also evident in the prior quarters. During its fiscal first quarter, IBM's x86 server revenue declined 9% year-over-year while its mainframe business grew 7%. In the second quarter, System x was down 11% with System z up 10%.

Getting rid of commodity businesses is certainly in keeping with IBM's recent philosophy, as evidenced by the 2005 sale of its PC business to Lenovo and the divestiture of its Printing Systems division two years later.

"Over the years, it has been very clear to us that IBM has been divesting commodity parts of the portfolio to focus on higher value-add areas such as software, services, or next-generation computing, such as cognitive computing -- for example, the Watson supercomputer," said Brian White, an analyst at Cantor Fitzgerald.

Earlier this month IBM announced its plan to set up a New York City-based business unit devoted to Watson. The company will also invest more than $1 billion in the Watson Group, focused on R&D and bringing cloud-based applications and services to market.

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