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IBM May Buy Sun for $6.5 Billion

BANGALORE (Reuters) – IBM is in talks to buy Sun Microsystems Inc for at least $6.5 billion, The Wall Street Journal reported, in a deal that could bolster their computer server products against rivals such as Hewlett-Packard Co. That would translate into a premium of about 100 percent over Sun’s Nasdaq closing price Tuesday of […]

Written By

DS

Datamation Staff

Mar 18, 2009

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BANGALORE (Reuters) – IBM is in talks to buy Sun Microsystems Inc for at least $6.5 billion, The Wall Street Journal reported, in a deal that could bolster their computer server products against rivals such as Hewlett-Packard Co.

That would translate into a premium of about 100 percent over Sun’s Nasdaq closing price Tuesday of $4.97 a share, the paper said, citing people familiar with the matter.

Sun, which was not immediately available for comment, has long been cited as a takeover target for International Business Machines Corp, HP, Dell Inc or Cisco Systems Inc, which this week unveiled its plan to start making blade servers that power corporate computer networks.

But bankers and analysts have also said the challenge of valuing Sun’s intertwined software, hardware and services businesses could put off potential buyers. The company has never fully recovered from the dot-com bubble burst in the early 2000s, when demand for its high-end servers cratered.

“It makes sense in an industry consolidation view, but looking at Sun’s performance over the last couple of years, it’s not one of my top picks for IBM to buy,” said Jyske Bank analyst Robert Jakobsen, speaking from Denmark.

“Having said that, there’s clearly a huge synergy combining these two companies,” he said.

“It will lessen the competitive pressure within the data center,” he said, adding, “The market hasn’t been kind to Sun Microsystems in the last 12 months. So it’s not an expensive acquisition in my view.”

An IBM spokesman in Bangalore declined to comment. The U.S. representatives of the company, which had nearly $13 billion in cash at the end of 2008, were not immediately available.

The Frankfurt shares of Sun rose 54 percent after The Wall Street Journal’s online report, which said the company had approached a number of large tech companies in the hopes of being acquired. HP declined the offer, the paper said, citing a person briefed on the matter.

The paper said a deal with IBM could happen as early as this week, but that talks could also fall apart. If IBM buys Sun, it would be the company’s largest acquisition since it bought Canadian software maker Cognos for about $5 billion in January 2008.

GLOBAL IT SPENDING CUTS

IBM was the world’s largest maker of servers in the fourth quarter, with a market share of 36.3 percent, according to market researcher IDC. HP came next with 29.0 percent, followed by Dell, 10.6 percent; Sun, 9.3 percent; and Fujitsu, 4.2 percent.

The top five server vendors all posted declines in their fourth-quarter server revenue, hurt by pullbacks in corporate spending on technology due to the weak global economy.

Cisco’s new foray into the server market could trigger a wave of mergers and acquisitions, analysts have said, citing data equipment maker Brocade Communications Systems Inc, infrastructure software maker Citrix Systems Inc and niche network optimization companies, such as Blue Coat Systems Inc and Riverbed Technology Inc, as possible targets.

“This is about the fact that IBM wants to become a one-stop shop for all IT related offerings, whether it is hardware, software services or solutions,” Avinash Vashistha, chief executive at IT consultancy Tholons Inc, said of IBM’s reported interest in Sun. “They have been executing this strategy for the last few years and with the Sun deal, they will only accelerate that move.”

Sun, whose name stands for Stanford University Network, rose to prominence in the 1990s when start-ups flocked to its high-end computers, which run on its Solaris operating system and have been widely used in the financial services industry.

When the Internet bubble burst in 2000-01, funding for start-ups dried up along with much of the demand for Sun’s computers. Sun tried to reinvent itself by acquiring companies and expanding production of Linux-based computers, which tend to be cheaper. But that failed to revive its stock price.

Sun stock is down 71 percent in the last 52 weeks, a far cry from an all-time high of $258.75 that it touched during the dot-com boom.

The company — which is shedding up to 6,000 jobs, or 18 percent of its workforce — reported a net loss of $209 million for its second quarter ended December 28, compared with year-earlier net profit of $260 million. Revenue fell 11 percent to $3.22 billion.

Analysts said technology companies were looking to acquisitions as organic growth was difficult given the poor economy.

“Plus, valuations are also very cheap now,” said Tarun Sisodia, a technology sector analyst with Indian brokerage Anand Rathi Financial Services. “It’s a good time to pick up the companies that can contribute to your growth in these difficult times.”