|TECHNOLOGY APRIL 6, 2009 |
IBM, Sun Talks Teeter Over Price
By WILLIAM M. BULKELEY and DON CLARK
Talks between International Business Machines Corp. and Sun Microsystems Inc. were at risk of unraveling, threatening to undermine a potential $7 billion acquisition that would place one of Silicon Valley's iconic companies under the Big Blue umbrella.
People familiar with the situation said Sun's board rejected a formal acquisition offer by IBM on Saturday. They said the board believed IBM's offering price, believed to be $9.40 or below, was too low. Sun also feared that the offer gave IBM too much "optionality," or leeway to walk away from the deal, according to one person familiar with the talks.
Late-stage deal negotiations are often full of brinkmanship, and it's possible the two sides are hardening their positions only to strike a full deal in the near future.
A person familiar with the situation said that Sun has sent a notice terminating IBM's agreement for exclusive negotiations. In return, IBM has withdrawn its offer to buy Sun, said a person informed about the situation. But another person familiar with the negotiations suggested the situation was "fluid" and the parties were still in touch by phone.
Word of talks between the two companies first came last month in The Wall Street Journal. Neither Sun nor IBM confirmed they were in negotiations by press release or Securities and Exchange Commission filings.
The stakes are higher for Sun than for IBM: Sun has no other prospective suitors, and without a deal, its stock price would likely sink to the $4 to $5 range, where it traded before news of the talks last month.
For IBM, a purchase of Sun would represent the biggest deal in the century-plus history of a company that has become the world's biggest provider of computer services, its second-biggest software company and the biggest vendor of large computer servers. IBM's interest in Sun was spurred by its desire to gain clout in the growing market for "cloud computing," a loosely defined business in which customers rent computing power from remote locations via the Internet instead of buying machines and software of their own.
IBM was especially interested in Sun's software and the community of developers using Sun's freely available Solaris, Java and MySQL software products. It also thought Sun could help it fight Microsoft Corp. by providing free alternatives to the Windows operating system.
When word of talks were first broke, investors expected Sun to fetch $10 to $11 a share. But the price apparently came down as Sun demanded assurances that IBM would proceed with the deal in the face of anticipated regulatory challenges.
Some antitrust lawyers had predicted IBM would have a hard time getting clearance for the deal in both the U.S. Justice Department and the European Union because the companies have overlapping product lines. The computer maker could have opted to spin off Sun's tape-based storage systems, as a merger would have given IBM nearly 100% of that market. But the combination would have also have given IBM about 65% of the $17 billion market for servers that use the Unix operating system, according to the market research firm IDC.
People familiar with the situation say IBM's lawyers had satisfied themselves that there were no impediments to a merger lurking in Sun's licensing and contracts. In its preliminary talks, Sun agreed to take a per-share price of $9.55, about $1 a share lower than expected, in order to get IBM to promise to conclude the deal even if regulators forced some divestitures.
The apparent impasse in the talks with IBM won't necessarily attract other suitors to Sun. People familiar with the situation say Sun's investment bankers approached most large information-technology firms during the winter after IBM expressed interest in an acquisition, and all passed.
A takeover of Sun would mark an inglorious end for a company that remained a Silicon Valley leader even as its financial fortunes languished. Sun's stock-market value topped $200 billion during the Internet bubble, but the company never fully recovered from the ensuing bust. Yet it retains a slew of loyal customers and a trove of potentially valuable software and technology.
If talks collapse, Sun would face pressure to find other plans to bolster its stock price, which had fallen 79% in 2008. Sun's shares traded at 4 p.m. Friday at $8.49, up 28 cents. That's nearly 71% above their price before reports that the two companies were in takeover talks.
Toni Sacconaghi, an analyst with Sanford C. Bernstein, said the Sun "board is going to have a lot of explaining to do if they turned down an offer of $9.40 a share." He noted that Sun's stock price during the fourth quarter was between $3 and $4 a share and that the outlook for tech spending has deteriorated since then. He added that the public disclosure of the talks with IBM "casts uncertainty among customers about Sun's future."
"This is very disappointing," said an investor who holds Sun shares. "However," he said, "if Sun felt that IBM wouldn't promise to take on antitrust regulators and proceed with the deal under most conditions, it's understandable that the Sun board turned it down." He added: "The Sun board isn't stupid. They must have a reason for doing it."
In Silicon Valley, rivals poked fun at IBM for pursuing the fading company. But IBM -- whose earnings have grown $5 billion since 2004 to $12.34 billion last year -- has been outpacing most of Silicon Valley recently, and would stand to leverage Sun into even more gains. Adding Sun's $13 billion in sales would put IBM neck-and-neck with Hewlett-Packard Co. as the world's largest information-technology purveyor, with combined revenues of $117 billion and 41% of the $50 billion server market.
Although Sun gets only 6% of revenue from software, IBM believed Sun's software has an outsize impact on the university-based and entrepreneurial software developers whose work pushes advanced technology like cloud computing. Sun has software called VirtualBox that competes with other popular "virtualization" software for servers that is critical in making cloud computing effective. It is starting a cloud-computing service called Sun Cloud that sells computing power in competition with Amazon Inc.
"Sun is providing a model that can be commoditized. IBM doesn't have that consumer end," says Habeel Gazi, an analyst with Info-Tech Research, London, Ontario.
Write to William M. Bulkeley at firstname.lastname@example.org and Don Clark at email@example.com