IBM cuts Sun offer, to unveil deal next week: source

IBM cuts Sun offer, to unveil deal next week: source
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First Published: Fri, Apr 03 2009. 11 03 AM IST
Updated: Fri, Apr 03 2009. 11 03 AM IST
Toronto/Boston: IBM cut its offer for Sun Microsystems Inc to $9.55 a share after a thorough vetting and may soon unveil details of its largest- ever takeover, a source with knowledge of the matter said on Thursday.
But the source, who was not authorized to speak publicly about the deal, said that price was not final, although IBM had decided Sun Micro was worth less than thought after a weeks- long due diligence process.
A merger would create a server industry powerhouse with a commanding 65% of the $17 billion Unix server market, a dominance analysts say might trigger antitrust scrutiny and concerns from clients.
A deal at $9.55 would mark a 92% premium - or almost double - Sun’s closing share price on 17 March, the day before news of IBM’s offer emerged.
Sun agreed to a lower price in return for stronger commitments from IBM that it will complete the deal, even if it faces intense regulatory scrutiny, the Wall Street Journal cited people familiar with the matter as saying.
Sun would hand IBM a clear lead at the high end of the $45 billion overall server market fought over with Hewlett-Packard Co. It would broaden IBM’s software portfolio, add storage products that vie with EMC Corp and Network Appliance Inc and provide an edge over Cisco Systems Inc, which some see as its biggest rival in the long term.
“Sun has many valuable assets that have not been adequately monetized,” said Cross Research analyst Shannon Cross.
But she added the challenge would be to integrate the two cultures and product lines.
The Wall Street Journal reported on Thursday that IBM was in the final stages of negotiations with Sun, but had reduced its offer from $10 to $11. Last month, the newspaper reported the deal was worth about $8 billion, including $1.4 billion in cash on Sun’s balance sheet, if IBM were to pay $10 to $11 per share.
Officials with IBM and Sun, which now carries a market capitalization of about $6 billion, declined to comment.
Some analysts say IBM could have a hard time improving performance at Sun, which has been lackluster for years. IBM, which runs services, hardware and software businesses, has kept profits growing in the midst of the worst US economic recession in decades.
The shares of the Sun - whose name was once synonymous with the Internet, but never recovered from a dive in sales after the dot.com bubble burst - have lost 97 percent of their value since peaking at $260 in 2000.
Setting sun
On Thursday, they jumped 2.6% in after-hours trading after rallying the same amount in the regular session. IBM shares held steady in extended trading after gaining more than 3%.
Sun rose to prominence in the 1990s, but after the dot.com bubble burst earlier this decade, it failed to generate substantial profit from software products, including Java and Solaris.
To counteract a potential slide in margins after a deal is completed, IBM is likely to embark on a major reorganization that could produce more job losses at a company known for talented engineers and a heavy focus on research and development.
IBM has already cut thousands of jobs.
Canaccord Adams analyst Peter Misek said the strategy was to make Sun’s business profitable for IBM by reducing costs, while helping IBM enter new markets and giving it new technology.
“Makes a ton of sense if they can pull enough costs out,” Misek said.
IBM led the business of selling high-end UNIX servers last year, claiming about 37% of sales. It was followed by Sun with 28% and HP with 27%, according to market researcher IDC.
A merger of the two would have less impact on the low end, x86 server market, where profit margins are tight and there is less differentiation between products from competitors.
Sales in that sector totaled some $28 billion last year. HP led that segment, claiming 37% of the market, followed by Dell Inc with 22%, IBM with 16% and Sun with 2.5%.
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First Published: Fri, Apr 03 2009. 11 03 AM IST