Sun Catches Yahoo Disease

What is it with these downtrodden tech companies that are targets of buyouts insisting they're being undervalued and walking away from negotiations?

That's what Yahoo did last year with Microsoft after Redmond made an acquisition offer well above the search pioneer's stock price. Now Sun Microsystems is playing the same brand of ill-advised hardball with IBM:

The Wall Street Journal is reporting that merger talks between Sun Microsystems (NASDAQ: JAVA) and IBM (NYSE: IBM) have collapsed, placing the potential $7 billion deal in jeopardy.

The WSJ reported that Sun officials felt that IBM's offer of $9.40 a share or less was too low and that IBM had too much leeway to walk away from the deal, which could face substantial antitrust issues in the Unix server and mainframe storage markets.

The two sides could still work out a deal, but the Journal reported that Sun has sent a notice terminating IBM's agreement for exclusive negotiations, while IBM has withdrawn its offer to buy Sun. The two sides apparently remain in touch by phone, however.

On March 18, when the rumor first was reported by the WSJ, I wrote that IBM's offer was way overpriced. The market confirmed this by nearly doubling Sun's (NASDAQ:JAVA) share price to $8.85 by the end of that day. Today, the market is responding in an equally rational fashion. Sun, whichclosed Friday at $8.49, was down the entire day, rallying slightly at Monday's close to end at $6.50, a drop of 23.3%.

So where does this leave Sun. In the same place as Yahoo -- with uncertain prospects at best:

Sun is believed to have no other prospective suitors, as the company reportedly sought bids from other large IT companies after IBM expressed an interest but found no takers.

The Journal reported that Sun's board is split over the proposed deal, with Sun chairman and co-founder Scott McNealy leading the opposition, and CEO Jonathan Schwartz heading the side in favor of the merger.

If this is true, I'd say that McNealy is doing exactly what Yahoo co-founder Jerry Yang was doing in rejecting Microsoft's buyout offer: Letting emotions and misplaced loyalty get in the way of rationality and common sense. Their jobs are to look at the current handwriting on the wall and consider the best interests of today's stockholders. The economy is horrible, Sun continues to lose money, it has no viable turnaround strategy and no other company appears interested in buying it. Clinging to fond memories of the past does no one any good.