IBM Really, Really Doesn't Want Sun

Published: April 20, 2009

by Timothy Prickett Morgan

This is getting ridiculous. Well, maybe it was ridiculous from the beginning. Anyway, the latest reports are that server and operating system maker Sun Microsystems was, as of the end of last week, still interested in renewing acquisition talks with IBM. However, Big Blue has, according to sources, lost interest. Again.

Bloomberg reported on late Wednesday (April 15) that people familiar with the situation said that Sun was still interested in selling itself to Big Blue, but it was sticking to its line that IBM had to assure Sun's board of directors that it would commit to the deal and see it through various antitrust regulators. The ghost of antitrust lawsuits with the U.S. Department of Justice, and consent decrees that IBM signed in 1956 and amended in 1969 to govern its behavior, seem to be haunting Big Blue.

And rightly so. The very governments that will be looking at the deal are big users of IBM mainframes and Unix iron from Sun, and if there is only one guy controlling those two platforms, competition will cease. Right now, only the high-end Unix server market puts any competitive pressure--albeit somewhat indirectly--on the mainframe market. And it would not be surprising to see very big mainframe and Unix shops get involved if IBM tries to do the deal. Perhaps with a lawsuit arguing over the establishment of the relevant market for determining with IBM would have a monopoly in high-end servers and therefore be subject to regulation again.

A decade ago, IBM was able to argue that the relevant market for mainframes and AS/400s was the server market at large, even though we all know that IBM has a monopoly on both platforms and customers have legacy lock-in that gives IBM great sway over prices and profits from these products. There is no law against a monopoly, but monopolies are regulated, and that usually means lower profits. So if IBM thinks a Sun deal might revive scrutiny of the System z and Power Systems and their relevant market, you can understand why the company is reacting to Sun as if it had just stepped on a rattlesnake snake. It is not, I am convinced, about the money that IBM is willing to pay for Sun (just shy of $7 billion), but rather the profits that are at stake and the possible effects on profits that a Sun acquisition will have if someone sues to block the deal, and some bureaucrat or judge decides IBM charges too much for mainframe and Power Systems hardware and software.

I don't spend my day listening to the squawking and raving on CBNC, but I do read the newswires religiously, and Reuters reported on Thursday morning (April 16) that sources told CNBC that IBM is no longer interested in buying Sun precisely because of the increased legal scrutiny the deal would face. Sun apparently asked IBM to come back to the bargaining table earlier last week, but regulatory agencies told Big Blue, according to these sources, that the deal might take six to nine months to get regulatory approval.

And that would mean not only that Sun's business would stall, affecting its value and its revenue stream, but that IBM would have to provide regulators with lots of detailed sales and market share data for its server and operating system businesses to prove that the Sun acquisition would not damage competition. Which is, of course, perfectly idiotic. Of course IBM buying Sun would lessen competition. But, then again, so does a Sun that is being run by Wall Street and some private equity firms, too. So that is not a test of anything, ultimately, except the problem with being a public company when you are trying to make big transitions and ride out a bad economy at the same time, as Sun is trying to do.

As far as I know, no one has formally asked Eric Holder, the attorney general in the Obama Administration, or Scott Hammond, acting assistant attorney general in charge of the department's Antitrust Division, what they think about a tie-up between Sun and IBM. But as you can see from a listing of Hammond's speeches over the years during his tenure at the DoJ, he is not too keen on cartels and he is big on criminal enforcement of rulings relating to antitrust matters.

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