IBM Poised to Buy Sun, Rumors Say
April 6, 2009 Timothy Prickett Morgan
Well, Big Blue and Big Mouth seem to be getting closer to closing a deal that will see IBM acquire its archrival in servers and systems software and its partner in Java, Sun Microsystems. Perhaps more than any other acquisition in the history of the computer business, this one, should the talks stop and the deal unravel, marks a dramatic change in the IT landscape. And I don’t necessarily mean a good one.
Late last week, I heard a rumor from people a lot closer to the situation than myself that a deal could be announced as early as Friday morning, timing that was later echoed in an article in the New York Times by journalists I respect and who are wired into the Silicon Valley technorati a heck of a lot more than I am. The Times piece conceded that the deal could get done on Friday, once the 100 or so lawyers that are holed up in a hotel in the Valley are done with due diligence work on Sun’s licensing agreements and contracts, but not be made public until early this week.
Both the Times and the Wall Street Journal, which broke the IBM acquisition of Sun story back on March 18 and which has been the main source of what little information that we know about the talks between the two companies, said that Sun had agreed to accept a lower price for the acquisition in exchange for a firmer commitment from IBM to proceed with the deal and run the gauntlet of regulators in the United States, Europe, and Japan that might try to stop the acquisition on antitrust grounds. The original story from three weeks ago pegged the value of the deal at between $10 and $11 per Sun share, and then the rumors on Thursday had it between $9 and $10 per share. By Friday afternoon, the updated Times story had the deal pegged at $9.50 per share and the updated Wall Street Journal story (which you can read here) had it at $9.55 per share. Sun has 728.9 million shares outstanding, and that works out to between $6.92 billion and $6.96 billion, not counting whatever cash and liabilities Sun has that might cushion the economic blow of the deal for IBM. Basically, that is anywhere from $364 million to just over $1 billion less than the numbers that were being tossed around.
People must have a higher opinion of the current state of antitrust law enforcement than I have, and they must be thinking that Sun is in a position to negotiate when I really don’t think it is. If anything, the governments of the world would probably look at this deal more like JPMorganChase being pushed by the Federal Reserve and Treasury Department last year to acquire Bear Stearns, or Bank of America being strongly encouraged by Uncle Sam to buy Merrill Lynch to save the banking system. IBM can guarantee that legacy Solaris systems get supported a lot better than Sun can right now–particularly if this deal falls through, its stock crashes down to $2 or $3 per share and then Dell or Hewlett-Packard or some cash-rich Middle Eastern government sweeps in an buys it up for a lot less money, angering investors.
Dell, Fujitsu, Unisys, Hitachi, NEC, and Bull will all be hurt directly or indirectly by an IBM-Sun tie-up, each for different reasons but the main one all comes down to the ability to innovate and compete on price in a market with wickedly tight control over supply chains for parts and over sales channels for customers. I think the IT industry needs different kinds of thinking, different kinds of products, and companies that try to solve IT problems in different ways. This is how innovation works. But in a mature IT industry in an economy that is contracting even more quickly than during the dot-com bust in 2001 and 2002, survival is the first order of business. And if Sun can’t survive along, it has no choice but to seek safety in IBM’s scale, scope, and balance sheet.
It’s a damned shame, though. It shouldn’t oughta be this way. Sun was a real innovator, unlike so many other IT pretenders. Maybe Bigger Indigo will be a better company than Big Blue could be by itself. There is always that hope, that this is not just about numbers on some spreadsheet running on a laptop and a pile of contracts in a hotel office. But I have my doubts about public companies doing the public good. They seem to work mainly for their own good, and usually only over the short term of a few 13-week quarters.