Chinese PC maker Lenovo has agreed to buy IBM’s low-end x86 server business for $2.3 billion, enabling IBM to shift its focus to its services and software business.

History with Lenovo

It is, however, keeping its other mainframe server business, including its System z mainframes, Power Systems, Storage Systems, Power-based Flex servers, and PureApplication and PureData appliances.

This is not the first time Lenovo has bought an IBM business. In 2005, Lenovo bought IBM’s ThinkPad business for $1.75 billion, a move that eventually made Lenovo the top personal computer maker in the world as of two years ago.

More recently, discussions over a sale of the business broke down when the two companies couldn’t agree on a price. According to reports at the time, Lenovo had valued the business at less than $ 2.5 billion, with IBM reportedly asking for more.

In the meantime, the two companies have collaborated on a number of projects, and it looks like this collaboration is set to continue into the future.

In a statement issued by IBM on the deal, it said the two companies would enter into a strategic relationship that will include a global original equipment manufacturer (OEM), and reseller agreement for sales of IBM’s midrange disk storage systems.

This will also enable IBM to continue to develop its Windows and Linux software portfolio for the x 86 platforms.

Lenovo’s Interest

This will be the biggest technology deal between China and the US to date if approved by the  US Dept. of the Treasury's Committee in Foreign Investment in the United States (CIFUS). The inter-agency committee has to approve the acquisition before it can be closed.

The deal will boost Lenovo’s market share in the server market from 2 percent to 14 percent, with Lenovo committed to developing this even further. In a statement, Yang Yuanqing, chairman and CEO of Lenovo, explained:

This acquisition demonstrates our willingness to invest in businesses that can help fuel profitable growth and extend our PC Plus strategy…we are confident that we can grow this business successfully for the long-term, just as we have done with our worldwide PC business.”

It also gives Lenovo a bigger footprint in the enterprise hardware market and will up the ante in its ongoing battle for dominance of the PC market with Dell and HP.

IBM’s Shifting Focus

For IBM, the deal moves it out of a low-margin business in which revenues declined by 16 percent last year.

In its recent quarterly figures, it posted a loss of $26.4 million for the 12 months ending Dec. 31, compared with a profit of $187 million in the 12 months ending March 2013. Overall, the x86 unit has annual revenue of $4.6 billion.

However, it doesn’t appear to be financial considerations that are driving this deal, but strategic ones. Only this month, IBM announced the creation of the new IBM Watson Group that aims to monetize the technology behind Watson after disappointing returns from this to date.

It also announced that it was ploughing $1.2 billion into development of new of data centers around the world, as well as its cloud computing business based on SoftLayer.

This is not just speculation either. IBM in the statement around the deal said it was getting rid of the x 86 server businesses to develop its cloud and big data business. Steve Mills, senior vice president and group executive of IBM Software and Systems, noted in a statement:

This divestiture allows IBM to focus on system and software innovations that bring new kinds of value to strategic areas of our business, such as cognitive computing, big data and cloud. IBM has a proven record of innovation and transformation, which has enabled us to create solutions that are highly valued by our clients."

Once the deal closes, 7,500 IBM employees are expected to become Lenovo employees.