Thursday, March 19, 2009

IBM, Sun Microsystems Deal Could Create High Tech Juggernaut


With a reported $6.5 billion cash offer on the table for Sun Microsytems, IBM would be well positioned to snag significant market share in enterprise server hardware and software, particularly in Linux and Java software for Web application development. The deal would also give IBM a leg up in the data storage, government systems and telecommunications markets.

IBM may acquire Sun Microsystems for as much $6.5 billion in cash, a premium of more than 100 percent over Sun's March 17 closing price of $4.97 a share. The proposed deal -- neither confirmed or denied by IBM and Sun -- would give IBM a powerful market position in open-source Linux and Java software for Web application development, data storage, government systems and telecommunications.

The Wall Street Journal, which reported March 18 the two companies were in talks about a possible deal, said Sun had been shopping itself in recent months, including approaching IBM server rival Hewlett-Packard and Dell. If a deal is made for $6.5 billion, it would be IBM's largest ever acquisition, eclipsing the $5 billion IBM paid for Cognos in 2007.

"It would certainly create a high tech juggernaut in the software and server business," said Technology Research Research senior analyst John Spooner. "It's an opportunity for IBM to take out a competitor and gain market share, particularly in open-source products."
Both IBM and Sun build enterprise servers that use open source to operate without Microsoft's Windows software or Intel's microprocessor chips. IBM is the world's largest server manufacturer with 31 percent of the market while the struggling Sun is in fourth place at 10.6 percent, trailing IBM, HP (29.5 percent) and Dell (11.6 percent).

"A deal would certainly give IBM a significant boost in open-source products," Spooner said. "IBM would simply expand what Sun's already doing." Spooner added it wasn't surprising Sun was seeking a buyer. "The bulk of Sun's business comes from U.S. companies that aren't really buying anything right now. IBM has plenty of cash."

Roger Kay, president of Endpoint Technologies Associates, noted that Sun owns a lot of intellectual property with a "pretty good portfolio. IBM thinks it can do more with those assets than Sun. It seems like a pretty good fit and it seems to make sense."

In November 2008 -- stunned by a nearly $2 billion quarterly loss -- Sun announced a massive restructuring of its business into three divisions that resulted in the cutting of up to 18 percent of Sun workers around the world. Under the plan, Sun collapsed its organization into three primary business units: Application Platform Software, Systems Platforms and Cloud & Developer Platforms.

Sun's fourth quarter loss was a huge reversal from the same period in 2007, when the high-end hardware and software company reported an $89 million profit.

"Sun is still fairly valuable," Kay said. "Sun has not been particularly well positioned lately. IBM will create more outlets for Sun's products.

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