IBM in Talks to Buy Sun Microsystems

Channel News
0 0 No Comments

Reports overseas say IBM is in talks to buy Sun Microsystems to bolster its competitive position against Hewlett-Packard and Cisco Systems. Analysts say this is the first of many mega deals spurred by suppressed stock prices.

IBM is reportedly in talks to acquire struggling Sun Microsystems for at least $6.5 (£4.4) billion, giving it new weapons against market rivals Hewlett-Packard and the increasingly aggressive Cisco Systems.

Sun, which reorganised into three business units and laid off more than 6,000 employees last fall after reporting a nearly $2 billion (£1.35 billion) loss, has been struggling to find its place in the marketplace as the demand for its high-end servers and storage devices declines.

IBM and Sun are not talking about the reported acquisition talks. If the reported price tag for Sun proves true, it would be more than 100 percent multiple on its current stock price of roughly $5 per share. A Sun acquisition would consume more than two-thirds of IBM’s cash reserves if done as an all-cash deal.

If the deal comes to fruition, it will be the largest acquisition in IBM history and give the company added products and services to keep its competitive lead over HP in the server market, analysts say. IBM currently holds roughly 33 percent of the global server market to HP’s 30 percent. Buying Sun would up its share by 9.6 percent to 43 percent overall, according to estimates by Credit Suisse. Dell is the third largest seller of servers, holding an 11 percent share. Credit Suisse projects global server sales will fall 17 percent in 2009 under the weight of the global recession.

IBM has one of the largest reseller and solution provider channels in the world with more than 100,000 business partners. An IBM acquisition of Sun would plunge the comparatively smaller Sun channel into a much larger pool. The impact would provide Sun resellers with more products and services for its customers, while placing them into a more competitive marketplace.

Sun has steadily declined in recent years as the market shifted toward cheaper x86 servers over the company’s high-end, high-capacity RISC servers. Under the leadership of CEO Jonathan Schwartz, Sun has been migrating toward software, building up capacity in its Java programming language and Solaris operating system. Yet, even reorganising with a focus on software hasn’t stopped the company’s slide.

Published reports say Sun has approached several potential buyers, including HP, but was turned away. HP reportedly declined the offer.

Cisco this week announced its entry into the blade server market with the unveiling of its unified computing architecture. Cisco’s plan is to leverage virtualisation and network management to deliver greater efficiency and cost savings to data centre operations. Cisco is partnering with industry heavyweights Microsoft, EMC and VMware to deliver its unified computing vision.

The IBM-Sun deal could be the first of many mega-mergers and acquisitions in the technology industry. Many technology stock prices are well below $20 (£13.56) per share, suppressing corporate valuations and making many one-time untouchable companies acquisition targets. Several industry icons, including Oracle CEO Larry Ellison, have said they plan to use the suppressed stock market to bargain hunt among weakened companies.

The recession and the financial market credit crunch took a toll on technology mergers and acquisitions in 2008, as deals fell to their lowest levels in a decade. “While the economic uncertainty of 2008 is most certainly going to hang over into 2009, we believe that M&A will remain an important corporate strategy for growth and enhanced competitiveness. 2008 has proved that even in the most troubled economic environments, well-considered M&A transactions were still announced and completed,” Update Advisors wrote in its recent report.

Despite having their stocks hammered by the bull market, the top technology vendors are sitting on piles of cash, giving them the financial resources to snap up rivals and complementary companies at fire sale prices.

According to FactSet Mergerstat, an analyst group that tracks merger and acquisition activity, the top eight technology vendors have nearly $110 billion (£74.6  billion) in cash reserves. Cisco tops the list with $27 billion (£18.3  billion) in the bank, followed by Microsoft (£14 billion), Google (£9.7 billion), Oracle (£7.19 billion), HP (£6.98 billion), IBM (£6.65 billion), Dell (£5.8 billion) and EMC (£4 billion).