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Update: IBM reportedly halts Sun deal

Update: IBM Corp. reportedly withdrew its offer on April 5 to buy Sun Microsystems Inc. for about $7 billion, clouding the prospects for a deal that would have shaken up the computing industry. It is not clear whether Sun and IBM will eventually return to their talks, which were in their final stages in recent days. But IBM took its deal off the table this weekend after Sun terminated IBM’s status as its exclusive negotiating partner, according to a person familiar with the situation, who was not authorized to disclose the negotiations and spoke on condition of anonymity.

The breakup of the negotiations was first reported Sunday by The Wall Street Journal.

Armonk, N.Y.-based IBM was believed to be offering about $9.50 per share for Sun. That was about double the price the Santa Clara, Calif.-based server and software maker was trading for when the discussions leaked last month.

Sun was one of the darlings of the dot-com era but spent most of this decade struggling to find its place, wrestling with huge losses and thousands of layoffs. As a result many analysts were not surprised Sun and IBM were in talks.

Sun still owns key server and business-software technologies that might have fit in IBM’s product and services lineup. But a deal likely would have faced antitrust questions.

If IBM Corp. were to buy Sun Microsystems Inc. in the multibillion-dollar deal as the companies had been discussing, the combination of two formal rivals in enterprise computing could give Microsoft a run for its money, industry analysts had predicted–and some educators had wondered if the deal could result in more open-source options for their schools.

The acquisition would have been IBM’s biggest yet. If it eventually does take place, it would shake up Silicon Valley and the enterprise computing world, marrying two traditional foes whose animosity was relatively recently squashed. It also could draw antitrust scrutiny from the federal government.

If a deal did happen, it would come as companies specializing in computing infrastructure are consolidating and encroaching deeper onto each others’ turf. Hewlett-Packard Co. paid $13.9 billion last year to buy technology-services provider Electronic Data Systems, and last month Cisco Systems Inc. announced its long-rumored plans to start selling servers, a move that pits Cisco against longtime partners like HP and IBM.

Merging the corporate cultures of Armonk, N.Y.-based IBM and Santa Clara, Calif.-based Sun would be a challenge, and lots of Sun’s jobs probably would be cut. Sun revealed plans in November to jettison up to 6,000 jobs, or 18 percent of its global work force, after slashing 7,000 jobs the previous three years in several rounds of layoffs.

But Sun would come relatively inexpensively, because its shares have been on a downward trajectory since the dot-com bust. Although the nearly $7 billion price tag being widely reported would represent a significant premium over the market value of less than $4 billion that Sun had before the talks leaked, Sun’s last quarterly report shows it with more than $2.6 billion in cash and securities that could be readily converted to cash.

IBM would get access to many businesses, schools, and universities that use Sun’s servers or software and could be pitched on buying other things from IBM. Despite its long-running financial problems, Sun’s customer base is loyal: Market research firm IDC estimates that there are more than 1.6 million active Sun servers in use worldwide.

"Sun has a wealth of technology and intellectual property," said Jean Bozman, a research vice president with IDC. "You have to look at Sun in a three-dimensional way. It provides hardware, it does servers and storage, it has software–it has all these elements that would go into the next-generation data center, not just one or two. And it has historically been on the leading edge of technological trends."

As of the end of 2008, Sun owned 10.1 percent of the worldwide server market. IBM held nearly 32 percent, and HP had nearly 30 percent.

Sun is well regarded in engineering circles for spending big on research and development, even in tough times. Sun put $1.8 billion toward R&D last year, it is reported, more than 13 percent of the company’s total sales. That’s reportedly a much bigger slice of total revenue than either IBM (6 percent) or HP (3 percent) devoted to their R&D.

Sun’s commitment to R&D has made it a pioneer in high-end servers, microprocessors for servers, and the open-source software it gives away for free in hopes of attracting new customers to the Sun brand. Sun also has been a pioneer in networked computing, and its technology was instrumental in the rise of the internet.

In fact, in the heady 1990s when Sun was a darling, IBM often got a ribbing from Sun’s then-CEO, Scott McNealy. Touting Sun’s decentralized server technology, McNealy derided big, centralized mainframes–a core product from IBM for decades–as dinosaurs. IBM responded by naming a line of mainframes the "T-Rex."

Although Sun and IBM worked together to spread the Java programming language, which became a key ingredient of the internet, the companies’ relationship appeared to make its biggest improvement after Jonathan Schwartz took over from McNealy in 2006. Schwartz reached out to IBM and CEO Sam Palmisano to brainstorm ways they could cooperate–especially since they share Microsoft Corp. as a rival–and the companies ended up announcing an August 2007 pact to collaborate on server technologies.

Rick Hanna, an equity analyst with Morningstar Inc., said one advantage for Sun in selling to IBM is that the move could give longtime customers peace of mind that Sun will continue investing heavily in its technologies. A deal would also give Sun customers access to more technologies that IBM offers.

"It’s a necessary move for Sun–Sun by itself wasn’t viable long term," Hanna said. "IBM could probably take advantage of Sun’s variety of assets better than almost anybody else."

IBM has been heavily pushing the concept of cloud computing, in which computing resources are stored on a central server instead of a PC and are delivered to users over the internet. (See "Cloud computing: The economic imperative.")

John Krewer, superintendent of the Spotswood Public Schools in New Jersey, said the deal could "help create an industry leader" in cloud computing, given Sun’s expertise in internet tools.

In the future, Krewer said, the merger could "create more cost-effective solutions for server and computing needs that are network-based from remote locations."

Marc Liebman, superintendent of the Berryessa Union School District in California and a former IBM employee, said he thinks part of the reason IBM wants Sun is to move more heavily into the open-source software arena.

"I think they see this as a growth industry, and they don’t have any clout in that sector," Liebman said of IBM. "With their resources and positioning in the tech industry, I have to believe they think they can leverage Java and move quickly into the open-source area and take significant market share."

He continued: "If I am correct …, we will see all kinds of applications and opportunities for schools to get out of using Microsoft products and start building their own applications. That has the potential for starting a revolution about how technology is used in schools."

Some are taking a more cautious view of the impending deal.

Tracy Stewart, vice president of information technology at Regent University in Virginia, said the school has used Sun servers for the past decade, but the uncertainty surrounding Sun in recent months has altered Regent’s budget decisions.

Stewart said Regent has shortened its renewal cycle of Sun products and services, because signing on for more than a year of service could leave the campus without support if Sun is bought by IBM.

"It has made us nervous lately about what we do for renewals," she said. "We’re aware of [the situation], and we’re watching it."

Sun’s servers and IT assistance, Stewart said, have been excellent at Regent, especially when the IT department needs immediate help replacing a piece of equipment–a process that proves time-consuming with many companies.

Like many other schools, Regent has seen its budgets trimmed and has had several layoffs this year. Stewart said the campus does not use any IBM equipment, but she hopes affordable service will continue if IBM buys Sun in the coming weeks. 

"We’re not spending any money unless it’s mission critical," she said. "Everything has got to be the right decision. … It’s kind of scary, not that there’s ever a lot of room for mistakes."

On the other hand, IBM’s potential acquisition of Sun could stabilize the Silicon Valley company and ensure its customers are taken care of during the transition period, Stewart said.

"We hope with the investments we’ve made, someone will still be there to support us," she said. "A company like IBM buying [Sun] is probably a good thing. … It’ll probably bring vision to Sun."


IBM Corp.

Sun Microsystems

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