IBM Interested in Sun? A Flaming Red Herring

Someone has floated a trial balloon, through a leak to the Wall Street Journal, that IBM is in "talks" to buy Sun Microsystems (JAVA) for $6.5 billion. The only party that would leak this information is Sun itself, and it smacks of desperation in trying to thwart an unwanted acquisition, or to positively impact another deal that Sun is weak in.

If IBM wanted to buy Sun it would have done so years ago, at least on the merits of synergy and technology. If IBM wanted to buy Sun simply to trash the company, plunder the spoils and do it on the cheap -- the time for that was last fall.

Given that Sun has reportedly been shopping itself around (nice severance packages for the top brass, no doubt), it's more likely that Sun has been too successful at selling itself -- just to the wrong party at too low of a price. This may even be in the form of a chop shop takeover. The only thing holding up a hostile takeover of Sun to sell it for spare parts over the past six months was the credit crunch, and the fact that private equity firms have had some distractions.

By buying Sun, IBM gains little other than some intellectual property and mySQL. IBM could have bought mySQL or open sourced DB2 or a subset of DB2 any time, if it wanted to go that route. IBM has basically already played its open source hand, which it did masterfully at just the right time. Sun, on the other hand, played (or forced) its open source hand poorly, and at the wrong time. What's the value to Sun for having "gone open source"? Zip. Owning Java is not a business model, or not enough of one to help Sun meaningfully.

So, does IBM need chip architectures from Sun? Nope, has their own. Access to markets from Sun's long-underperforming sales force? Nope. Engineering skills? Nope. Storage technology? Nope. Head-start on cloud implementations? Nope. Java license access or synergy? Nope, too late. Sun's deep and wide professional services presence worldwide? Nope. Ha!

Let's see ... hardware, software, technology, sales, cloud, labor, market reach ... none makes sense for IBM to buy Sun -- at any price. IBM does just fine by continuing to watch the sun set on Sun. Same for Oracle (ORCL), SAP, Microsoft (MSFT), HP (HPQ).

With due respect to Larry Dignan on ZDNet, none of his reasons adds up in dollars and cents. No way. Sun has fallen too far over the years for these rationales to stand up.

Only in playing some offense via data center product consolidation against HP and Dell (DELL) would buying Sun help IBM. And the math doesn't add up there. The cost of getting Sun is more than the benefits of taking money from enterprise accounts from others.

The cost of Sun is not cheap, or at least not cheap like a free puppy. Taking over Sun for technology and market spoils ignores the long-term losses to be absorbed, the decimated workforce, the fact that Cisco (CSCO) will now eat Sun's lunch as have the other server makers for more than five years.

So who might by Sun on the cheap, before Sun's next financial report to Wall Street? Cisco, Dell, EMC. That's about it. And it would be a big risk for them, unless the price tag were cheap, cheap, cheap. Anything under $4 billion might make sense. Might.

So my theory -- and it's just a guess -- is that today's trial balloon on an IBM deal is a last-ditch effort by Sun to find, solidify, or up the price on some other acquisition or exit strategy by Sun. The risk of such market shenanigans only underscores the depths of Sun's malaise. The management at Sun probably sees its valuation sinking yet gain to below tangible assets and cash value when it releases its next quarterly performance results... soon.

The economic crisis has come at a worse time for Sun than just about any other larger IT vendor. Sun, no matter what happens, will go for a fire sale deal -- not a deal of strength among healthy synergistic partners. No way.

Disclosure: HP is a sponsor of BriefingsDirect podcasts.

Comments

[bearfund:]

Not sure about your argument as a whole, but you have got to be kidding me when you write "By buying Sun, IBM gains little other than some intellectual property and mySQL." MySQL is a tiny business that probably wasn't profitable before Sun bought it and certainly isn't now. Even if it were, it's a rounding error for IBM. And it's a cesspool of bitter infighting and leadership exodus. Nor is it a leader in technology. I wouldn't have paid $100m for it; Sun paid $1b. I don't see why you think IBM would pay $6b. As for the rest of what they'd be buying, Sun has a number of profitable businesses, some of which would actually be material to IBM. It generates plenty of cash, even with (conservatively) 40% more employees than it needs. I don't for one moment think IBM could make the integration work, but on a numbers basis they'd be getting a steal.

Make no mistake about it, a $6.5b offer undervalues Sun significantly. Whether anyone, or IBM specifically, would make such an offer or why, I have no idea. But your understanding of Sun's merits is deeply flawed. Surely if you weren't short before (ouch!) you are now, right? If not, why not? After all, if what you've written is true you will have several ways to profit and none to lose. Do you really expect us to believe you're turning down free money? I don't... which is why I think this is just a hatchet job.

Yes, I'm long.

Mar 18 10:55 AM

[TranceMist:]

You'd think the WSJ would check both sides before publishing a story like that based on a mere "trial baloon".

Anyway, your story reads as heavily biased.

Mar 18 11:08 AM

[oldumbguy:]

About 24% of stock held by insiders, any buyout deal will probably be welcome by the company.

Mar 18 11:14 AM

[H.J. Huneycutt:]

While this article does make some compelling points, it also glosses over a bit. I'm not intimately familiar with Sun, but I wouldn't discount the value of Open Office, as the government might be willing to shift towards open source at this point.

Mar 18 11:19 AM

[oldumbguy:]

PS, don't discount the Amazon link. IBM is a services company and the Sun Amazon link might be of some value.

Mar 18 11:28 AM

[PROXIMO:]

Sun has nearly doubled in price today, to market cap 6.7 billion. I do not think this price action occurs if this is merely a "trial balloon". My opinion only.

Mar 18 12:29 PM

[bricki:]

You left out one thing, customers. Sun has some pretty major highly entrenched server installations that I am sure IBM would like to add to their customer list. Plus being able to merge Sun's Java implementations with IBM's will provide a unified story to Java development community.

One thing Sun never had was a big market presence with its application servers, making it hard to monetize Java. With IBM now having ownership of both the Java brand and Websphere they have that space completely owned.

Mar 18 12:34 PM

[Thomas J. G...:]

On most big datacenter deals hp, ibm and sun bid. I personally tnink people gave Sun some business to keep them in the game. They didn't want a world where it was only HP and IBM. So what is IBM getting? One major competitor out of the game and the present value of their service contract profits.

Mar 18 12:40 PM

[jack dee:]

But more important than any of this is that C has tripled in value the last few days and now Sun has almost doubled. Enough to make me smile like its 1999

:)

Mar 18 01:01 PM

[Skeptical Ben:]

Now this is a good sign. If the market is going crazy on any takeover rumor at all, that's good news, it means people are trading and chasing profits instead of hiding.


On Mar 18 12:29 PM PROXIMO wrote:

> Sun has nearly doubled in price today, to market cap 6.7 billion.
> I do not think this price action occurs if this is merely a "trial
> balloon". My opinion only.

Mar 18 05:02 PM

[Whitehawk:]

I think this analysis is true. I'm not a fan of IBM, but Sun really screwed up in capitalizing big on open source and an option to IBM and HP. One of their announcements lately was flash-based server blades, showing some confusion to investors as to what their market really is. The stock price before their self-inflated delta today reflected their book value so I didn't buy, but now I wish I had ! Serendipity. Maybe its time to go short (short ratio 3.8 and growing?).


On Mar 18 12:40 PM Thomas J. Gordon wrote:

> On most big datacenter deals hp, ibm and sun bid. I personally tnink
> people gave Sun some business to keep them in the game. They didn't
> want a world where it was only HP and IBM. So what is IBM getting?
> One major competitor out of the game and the present value of their
> service contract profits.

Mar 18 05:34 PM

[goldenpiggy:]

Oh my I sense a lot of anger, uneasiness, anxiety... Are you holding shares from the dot com days, or do you have a gun pointed at your head since your short position in JAVA is about to destroy you?

Dude, you're like the laughing stock on all the message boards!

That's a strong insinuation you're making about Sun intentionally leaking such news. You'd think WSJ, AP, Reuters, etc. are that stupid to report something like this if it was "trial balloon?" These are not no-name I don't know who you are blogs.

You'd figure both Sun and IBM would have come out with statements by now putting an end to the rumor if it wasn't true.

We'll see soon enough who's the balloon head.

Mar 19 12:18 AM

[Moon Kil Woong:]

Synergistically, I must agree that I don't see much value in this asides fromthe fact IBM could lay off over 50% of Sun's workforce while retaining it's marketshare and slowly shifting them over to IBM platforms. But I guess they can do this anyway. They've been doing this gradually the last 5 years already.

The fact is probably Sun is trying to sell itself again. Whether anyone will bite is a whole different story. Maybe Cisco should since they decided that they are great enough to eat their own customer's lunch in the server market. Can you say, too much cash and not enough brains. That is just the type of company Sun needs to close a deal with.

Mar 19 01:35 AM

[Eric in IL:]

I think this is a cloud computing play. They get to corner the Unix market. They get NEBS compliant servers, which are integral to secure, hardened, high availability cloud computing. They get Storage, Virtualization...
mySQL? its open source, why pay? Although, having "supported" open source options for all configurations would give IBM better positioning for bundling Software, Hardware, and Services. IBM is back in a big way and it looks like they will come out of this downturn very well positioned.
No position currently, but I will average in once I get a better feeling about the world economy.

Mar 19 02:30 AM