IBM and Sun: Simply March Madness?

by Brenon Daly

Maybe the speculation around IBM (IBM) buying Sun Microsystems (JAVA) was nothing more than a bit of March Madness. When reports surfaced last month that a deal could be in the works, Sun’s long-ailing shares soared from about $5 to nearly $9 in a single session. (At the time, we also looked at what a potential pairing of the tech giants might mean.) And it wasn’t just sporadic trading that powered the mid-March move. More than 160 million Sun shares traded the day after The Wall Street Journal carried its report on initial talks, meaning volume was eight times heavier than average.

It turns out that anybody who bought the stock from then until last Friday is now underwater. (Or to continue our NCAA basketball terminology, they’ve had their bracket busted.) Both the WSJ and The New York Times reported Monday that a deal – even at a lowered price – may be off the table. Sun shares gave up one-quarter of their value in Monday afternoon trading, falling to about $6.50 each. Volume was again several times heavier than average.

Amid all these reports of tough negotiating and ‘recalibrated’ deal terms, we’re reminded of the five-month saga of one public company buying another public company last year. In mid-July, Brocade Communications (BRCD) unveiled a $3bn offer for Foundry Networks, paying nearly all of that in cash and only a tiny slice in equity. As the equity markets plunged last October, the two sides agreed to lower the deal value to $2.6bn by trimming the cash price and removing the equity component. (Brocade shares had been cut in half during the time from the announcement to the readjustment.)

Now, the combined Brocade-Foundry entity, which has existed since mid-December, has a total market capitalization of just $1.5bn. In fact, my colleague Simon Robinson recently speculated that Brocade may be attracting interest from suitors. One of the names that has popped up? IBM, which would get an instant presence in the networking market. And if Big Blue is done with Sun (as reports suggest), then perhaps the company will just shift its M&A focus.

Comments

[holmesnmanny]

What appears to have happened is that Sun's board didn't want to look like they were simply rejecting the offer outright so they told IBM that they had to guarantee that the deal would go through no matter what.......no matter if the government would say that they would have to make some concessions in terms of keeping it anti-trust friendly and IBM in turn told them to go to hell.

2009 Apr 07 02:53 AM

[holmesnmanny]

Sun needs money. IBM needs Sun's server business to further compete and spread their arms around. This seems like a deal that works for both sides.

Sun's board just doesn't want to make a deal that would be profitable in the long run to shareholders of both companies, imo.

2009 Apr 07 02:57 AM

[Pierr Johnson]

In my view, the logic of this deal has always been suspect. Yes, the value of Sun’s technologies is understated by the market cap that its existing financial structure allows. Unlocking this value through some sort of dis-amalgamation of Sun’s legacy and forward-looking businesses should be Mr. Schwarz and Co.’s primary goal. But IBM could hardly be the key to this value creation, because it directly competes against Sun in most of this latter company’s core businesses. Would IBM support Solaris against its own AIX? Though most of us hardly think about Unix computing these days, it is critical to most of Sun’s customers. And why acquire Sun if you don’t need (and shouldn’t acquire) Sun’s Unix-server and StorgeTek businesses? Indeed, if IBM’s goal is to acquire and retire these legacy businesses, anti-trust enforcement will indeed preclude its completion.

My advice to Sun management: It is time to slice and dice. In a normalized economy, technologies and businesses must not be supported with the expense structures of bygone eras. With regard to your products, show us (as Michael Capellas once said) what’s under the Kimono. Once these businesses are more profitably and clearly reflected in financial results, higher valuations will follow. Once non-core middling’s are gone (or at least disaggregated), investors will accord shares the appropriate valuation.

2009 Apr 07 10:48 AM

[holmesnmanny]

That makes little sense. You don't think two companies who compete would benefit from the synergies of a merger? Sun's best yearly income for the last three years was .74, equating to a stock price target of around a 7.50 stock price and IBM was reportedly offering 10 a share.

The consensus is a loss for the next 3 of 5 quarters. You don't seriously expect Sun stock price to stay above 6 dollars if that pans out, do you?

Apparently Sun's board don't want to be out of a job. That's really the only logical reason they would want to sabotage this deal. IBM's offer was completely sweet and Sun's shareholders got ripped off. There's no way this stock price is gonna make it to 10 dollars any time soon. You can write that down.


On Apr 07 10:48 AM Pierr Johnson wrote:

> In my view, the logic of this deal has always been suspect. Yes,
> the value of Sun’s technologies is understated by the market cap
> that its existing financial structure allows. Unlocking this value
> through some sort of dis-amalgamation of Sun’s legacy and forward-looking
> businesses should be Mr. Schwarz and Co.’s primary goal. But IBM
> could hardly be the key to this value creation, because it directly
> competes against Sun in most of this latter company’s core businesses.
> Would IBM support Solaris against its own AIX? Though most of us
> hardly think about Unix computing these days, it is critical to most
> of Sun’s customers. And why acquire Sun if you don’t need (and shouldn’t
> acquire) Sun’s Unix-server and StorgeTek businesses? Indeed, if IBM’s
> goal is to acquire and retire these legacy businesses, anti-trust
> enforcement will indeed preclude its completion.
>
> My advice to Sun management: It is time to slice and dice. In a normalized
> economy, technologies and businesses must not be supported with the
> expense structures of bygone eras. With regard to your products,
> show us (as Michael Capellas once said) what’s under the Kimono.
> Once these businesses are more profitably and clearly reflected in
> financial results, higher valuations will follow. Once non-core middling’s
> are gone (or at least disaggregated), investors will accord shares
> the appropriate valuation.
>

2009 Apr 07 02:59 PM