The End Is Near for Sun; IBM's Its Best Option

Sun Microsystems (JAVA) survived the dot com bubble but the financial crisis has dealt the company a blow it can’t recover from. The struggling Silicon Valley icon is rumored to be a take over target by IBM, which has offered $6.5 billion in cash, according to a report in The Wall Street Journal.

A majority of Sun’s customers were in the financial services sector - companies like AIG, Citigroup (C), Merrill Lynch (MER), Lehman (LEHMQ.PK), Bank of America (BAC), Countrywide and so on. Several of them don’t exist today - a mere 6 months after the start of the financial crisis. The ones that are around are laying off workers and not hiring; their share prices have dropped in excess of 90 percent and they are operating on taxpayer bailout money. They have no need or use for more Sun products. In fact, they are selling them to raise money and competing with existing Sun products in the gray market.

In the meantime, Sun has semi-transformed itself to a hardware and services play. It jumped on the Web 2.0 bandwagon and paid shady promoters like O’Reilly to flog its products to emerging start-ups. It was a disaster. Now, it has jumped on the cloud computing band wagon.

The real problem for Sun is that a bulk of it revenues come from services. It competes with Tata, Infosys (INFY), HP (HPQ), EDS etc. The former two have lower operating costs than Sun. In this environment where everybody is looking to cut costs, Sun is expensive. HP has had to cut pay twice in two months to lower the operating costs in addition to the layoffs to compete. It was a matter of time before Sun got squeezed from all directions. I think the management is wise to engineer an exit while it is still possible.

Comments

[polkaking2:]

Things IBM would get:
[1] Multi-threading technology. The expertise is there, in Austin, to add multithreading to the Power cores.
[2] Solaris. Controlling Solaris leaves HP hanging, effectively clearing the playing field in the high-end space.
[3] Java. Much maligned though it is, IBM already uses Java as a bridge from old systems to new systems. It makes IBM money.
[4] X64 systems, which the real world calls x86 systems. Sun's current systems are top-of-the-line, and IBM would be able to move them easily.

Mar 19 11:15 AM

[SanDiegan:]

Your photo of PSA flight 182 crashing in San Diego back in 1978 brings back unpleasant memories of friends and neighbors involved in that tragedy. Since you're being insensitive, why not just show a photo of the twin towers collapsing.

Mar 19 12:38 PM

[MRZ:]

Too bad search engines pick up garbage like this...

Mar 19 01:20 PM

[goldenpiggy:]

Very poor taste on your part to show that picture. What the F were you thinking? Don't you EVER make a mockery of tragedies where people's lives were lost.

Mar 21 12:58 AM

[bearfund:]

A company with $2b in cash that is cash-flow positive quarter after quarter isn't going away on its own, ever. I know it's hard to understand, but as long as you are generating cash you can operate forever even if pro forma earnings look awful. All this is even more true if the company has little or no debt to roll over. In such a situation, if the shareholders are smart they don't try to get acquired, they declare a dividend equal to 100% of FCF. It's much more useful in their pockets than it is doing dubious acquisitions.

Mar 21 10:41 AM