IBM-Sun Deal about Open Source/Cloud

Industry observers say that IBM's proposed purchase of Sun Microsystems goes far beyond the server market.
Posted March 20, 2009
By

- Reuters



NEW YORK (Reuters) - An IBM takeover of Sun Microsystems Inc would raise the prospect of creating a clear leader in computer servers, but gaining market share might not be what's behind IBM's expensive overtures in hard economic times.

Sun's software portfolio, including Java, MySQL and Solaris, offers IBM a chance to get an edge in nascent open source and "cloud computing" technologies that enable users to easily access applications over the Internet.

IBM may be betting that it can do a better job than Sun in taking advantage of such software, and use it to compete effectively against large technology rivals like Cisco Systems Inc and Hewlett-Packard Co.

Analysts said International Business Machines Corp doesn't need help in servers as it was already the world's largest vendor in the fourth quarter, with a market share of over 36 percent, according to market researcher IDC.

"They have a pretty good and complete line. They don't really need to add Sun. They could let Sun continue to wither and go its own way," said S&P Equity Research analyst Tom Smith.

An IBM-Sun tie-up would give the combined company more than a 40 percent share of the $53 billion market for servers. Top rival Hewlett-Packard currently has a 29 percent share, followed by Dell Inc, with under 11 percent.

A combined IBM and Sun would significantly change the balance of power in the $17 billion high-end Unix segment of the server market, where IBM and Sun were the top two players in 2008 with shares of 37 percent and 28 percent respectively.

Sources said on Wednesday that IBM was in talks to buy Sun. The Wall Street Journal said IBM was offering to pay between $10 a share and $11 a share, double Sun's Tuesday closing price of $4.97, or over $6.5 billion. IBM and Sun declined to comment.

EYES ON SOFTWARE

Software and services are already areas on which Armonk, New York-based IBM is focusing already, and they have helped the company maintain healthy margins and solid growth even as a weak economy has dragged down hardware sales.

Analysts said that the company was aiming to position itself for an economic recovery, as well as the next wave of the computing revolution, especially in emerging "virtualization" and "cloud" computing technologies.

Cloud computing and virtualization have become the tech industry's biggest buzzwords to describe systems that allow consumers, developers and businesses to use the Internet to access programs and data at remote computer centers.

As Internet traffic keeps growing on the back of online video use and social networking sites like Facebook, demand has grown for technology that helps save space and hardware.

Analysts said IBM is likely interested in Sun's Java software platform, as well as in MySQL, an open-source database used to run Websites that Sun acquired in early 2008. Open-source software allows users to access and modify source codes.

While Sun has failed to turn profits from its software portfolio, which also includes operating system OpenSolaris and off-site data storage company Q-Layer, analysts said IBM may make better use of them.

"They have more resources, more manpower, more expertise in more areas of the computing business all around. So they may be able to fit more pieces of the puzzle and come out with a better solution than Sun had," said S&P Equity's Smith.

Edward Jones analyst Andy Miedler also said he believes IBM is interested in expanding its software business, in addition to securing a bigger piece of the pie in the server market.

"Sun has been doing a lot in open source software. We think longer term IBM could be expanding there," he said.

NEXT WAVE OF COMPETITION

News of talks between IBM and Sun came after Cisco announced it would start selling servers aimed at data centers, by partnering with technology virtualization and storage companies like EMC Corp and VMware Inc.

The move will put Cisco in direct competition with IBM and HP, which are vendor partners. The budding rivalry, analysts said, may force them to acquire or ally with smaller firms to bolster their storage, security, and virtualization technologies so they can offer a broader set of products.

"When the economies pick up we believe corporations will be trying to improve productivity -- not by hiring or building plants but purchasing tech products; not just hardware, but also software, that enhances productivity," said Richard Sichel, chief investment officer at Philadelphia Trust Co, which owns IBM as well as HP shares.

Most analysts said they hadn't yet made up their mind on whether Sun was worth the hefty premium. Edward Jones' Miedler said IBM may launch massive cost cuts to make it worthwhile.

"How IBM would make this work financially is to significantly cut Sun's research and development and other overhead expenses, which would make IBM able to pay a premium and still potentially make money on the acquisition," he said.

But other analysts said IBM may actually want to keep Sun's R&D segment. "The batch of R&D computer scientists that maybe think a little differently to what IBM has done so far may give more things to mix together in the new generations of products," said S&P Equity's Smith.

Copyright 2009 Reuters. Click for restrictions.






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