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IBM in talks to buy Sun for $6.5 billion

IBM in talks to buy Sun for $6.5 billion
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First Published: Sun, Apr 05 2009. 10 37 AM IST

Eye on Sun: IBM chief executive Sam Palmisano. Harikrishna Katragadda / Mint
Eye on Sun: IBM chief executive Sam Palmisano. Harikrishna Katragadda / Mint
Updated: Sun, Apr 05 2009. 10 37 AM IST
International Business Machines Corp. (IBM) is in talks to buy Sun Microsystems Inc., people familiar with the matter said, a combination that would bolster IBM’s heft on the Internet, in software, and in finance and telecommunications markets.
The two firms have a common interest in that both make computer systems for corporate customers that aren’t reliant on Microsoft Corp.’s Windows software, and their product lines are less dependent than rivals’ on Intel Corp.’s microprocessor technologies. The two firms are also strong supporters of open source Linux and Java software.
Eye on Sun: IBM chief executive Sam Palmisano. Harikrishna Katragadda / Mint
People familiar with the matter cautioned that while talks are under way, a transaction might not occur and that the talks could fall apart. Ian Colley, a spokesman for IBM, declined comment on questions about any talks with Sun. A spokesman for Sun didn’t return calls requesting comment.
If the deal does go through, which is expected this week, IBM is likely to pay at least $6.5 billion (Rs33,410 crore) in cash to acquire Sun, the people said. That would translate into a premium of at least 100% over Sun’s ?closing price on Tuesday.
A combination would require melding companies with distinct, dissimilar cultures. IBM, an east coast stalwart that helped invent the computer industry, grew up with a button-down style and a philosophy of delivering what customers want. Sun, which grew up in the go-go environment of the 1980s in Silicon Valley, is an engineering-driven maverick with a record of major innovations that has lately struggled to profit from them.
Once the quintessential high-flying start-up under Scott McNealy, one of the tech sector’s most outspoken chief executives, the company started in computer workstations and morphed into a major seller of server systems during the Internet boom.
But the company has struggled since the dot-com bust, jumping late on the trend of low-cost servers that use chips from Intel and Advanced Micro Devices Inc. McNealy’s pony-tailed successor, Jonathan Schwartz, has driven the company to focus more on innovations in software and data storage. But Sun shares have plummeted over the past year, battered by its reliance on sales of high-end machines and customers in the financial sector, which experienced the economic slump earlier than other parts of the economy.
In recent months, Sun has approached a number of large tech companies in the hopes of being acquired, said people familiar with the matter. The world’s largest tech company, Hewlett-Packard Co. (HP), declined the offer, said a person briefed on the matter. A spokesman for Dell Inc., the world’s third largest server maker, declined to comment.
Any transaction would strengthen IBM’s position against rival HP. It could be the largest acquisition in IBM’s history, surpassing the acquisition of Cognos Inc. last year.
The deal would mark a sharp break from IBM’s recent past. It has been buying software companies and a few service firms in recent years. But it has been selling off hardware operations such as its personal computer (PC) business. IBM gets more than half its revenue from services, and services and software provide the bulk of its profits. Acquiring Sun would make hardware close to one-third of its revenue.
IBM has worked hard in recent years to boost its profit margins, and its profits exceed those of the larger HP. But buying Sun, which reported a $209 million loss for the second quarter ended in December, would hurt IBM’s profitability. It would have to slash the combined companies’ cost base sharply to gain a favourable reception for the deal from investors.
Acquiring Sun would bolster IBM as it takes on a new rival, Cisco Systems Inc., the networking company, which this week announced that it would start selling a server of its own. On Monday, Cisco CEO John Chambers said the company would continue to work with IBM despite the fact that the firms would be competing head-to-head on servers. A Cisco spokesperson declined to comment on a potential acquisition of Sun by IBM.
The deal furthers a recent pattern of consolidation in the tech industry around the services, hardware and software used to run data centres, the big computing rooms that store and process information.
HP, over the past few years, has acquired software companies to expand its offerings for managing data centres. And last year the company bought services giant Electronic Data Systems Inc. for at least $13 billion, putting it into direct competition with IBM on IT outsourcing services.
Along with companies such as IBM and Cisco, Dell, which specializes in selling low-priced servers, has been expanding its portfolio. It now offers its own data centre software and some services.
By making a bid for Sun, IBM may be acknowledging the necessity of competing in hardware, despite its slim profit margins. In recent years, Dell and HP have been pushing server prices down, and servers, like PCs, have increasingly become commodities.
The deal would strengthen IBM’s position as the world’s largest server maker. According to research firm IDC, IBM had 31.4% of the market last year; HP was second with 29.5%, and Dell third with 11.6%. Sun ranked fourth, at 10.6%.
In recent years, the market for servers has shifted from the huge, custom-built “mainframes” that IBM dominates to vast numbers of standardized computers. By pushing standardized servers, HP has made inroads on IBM. In the meantime, Sun has suffered, as its strategy of using its own operating system on standardized software has failed to propel new growth.
The deal could face regulatory hurdles. IBM and Sun make many overlapping products, and the two have dominant market shares in servers that run the Unix operating system. The two companies also have overlapping products in areas that include software and tape storage systems.
President Barack Obama’s choice to be the next antitrust chief at the department of justice, Christine Varney, has said she would take a different approach than the previous administration, which was widely viewed as more open to such mergers.
Don Clark and Ben Worthen contributed to this story.
wsj@livemint.com
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First Published: Sun, Apr 05 2009. 10 37 AM IST