Sun Needs IBM, Not Vice Versa

News reports Monday are saying that talks between Sun Microsystems (JAVA) and IBM have broken down, supposedly not over price. According to the Wall Street Journal, talks broke down when the Sun board rejected the formal acquisition offer from IBM and sent notice that they had terminated the exclusivity of talks only with IBM. Apparently the Sun board is split over whether to do the deal with the company’s Chief Executive wanting to do the deal, but the company’s co-founder and chairman Scott McNealy is opposed.

While price is certainly a concern of both parties, it seems that there is a difference of opinion on how hard IBM would be willing to push were the deal to face regulatory challenges. IBM states that they are fully committed to the deal, but Sun believes there was too much wiggle room for IBM to drop the deal if needed. This may be a very valid concern for Sun that they do not want to be left without a dance partner if the deal does face push back, but Sun needs to be very careful about how they play the situation. Should they turn negotiations into a confrontation, they may find themselves a stand alone business with no one interested in buying them.

Sun’s decline has been well documented and they began shopping themselves around last winter. Sun management needs to think long and hard before it leaves a deal on the table that would pay a 100% premium to the pre acquisition price. Perhaps IBM rival Hewlett-Packard (HPQ) could be interested but there has been nothing more than rumor to support that. After all, IBM was the only company that stepped to the plate when Sun began shopping itself around.

“Sun down 25% but up more than 100% year to date. There’s been a lot of talk on the street that if it’s not going to be IBM, who is going to buy Sun Microsystems? It is the number one target in the tech industry right now.” Fox Business Network 4/6/2009

Not surprisingly, Sun stock tanked 22.5% on Monday. After having an Undervalued stance on Sun for more than a year, we are reaffirming our Fairly Valued valuation on post merger announcement price levels. Fundamentally, Sun has been able to grow revenues steadily over the past few years but the company swung to a loss last summer. The fact remains, that Sun Micro needs IBM far more than IBM needs Sun. At this point the talks are “fluid” but it seems that IBM has all of the power in this situation. We do not know exactly what has been going on in negotiations but Sun management should tread carefully because there will be a lot of angry shareholders should the deal eventually die.

Original post

Comments

[epeon:]

I think IBM is still interested. But, they are playing it smart. Wait a few months and offer at 7.

Apr 07 04:59 PM

[Rampant_Rumor:]

"Sun has been able to grow revenues steadily over the past few years but the company swung to a loss last summer" ?????? Possibly if the word "revenues" was replaced by "earnings" your point would have validity. It makes no sense when applied to revenues:

Sun Annual Revenues
FY01: $18.25B
FY02: $12.5B
FY03: $11.4B
FY04: $11.19B
FY05: $11.07B
8/05 Acquired STK: ~$2.4B TTM revenues
8/05 Acquired SeeBeyond: ~$167M TTM revenues
FY06: $13.07B (Less than Sun+STK+SeeBeyond)
FY07: $13.87B (Barely > Sun+STK+SeeBeyond)
2/08 Acquired MySQLL ~$50M TTM revenues
FY08: $13.88B (Zero growth Y over Y)
FY09: 99.99% chance that revenue is down significantly Y over Y

One of Sun's biggest problems (after poor leadership and criminally insane BoD) is that they have had flat to negative revenue growth for the entire decade from their organic business. The increased revenue acquired from M&A (notably STK, SeeBeyond and MySQL) has not offset declines in legacy Sun products and service.

Apr 07 05:46 PM

[Benny Carlson:]

Sun needs IBM like a hole in the head. They'd be as well going under as watching most of their IP being trashed by a competitor.

Apr 07 06:44 PM

[Sun Down:]

I guess you might not get it. The BOD at Sun was divided. JIS and his faction wanted their money, (JIS alone almost $30M.) There greed was almost amazing as his team destroyed Sun in three years. Scott did not want to sell out, despite having $150M+ on the table. There will be another 7,000 - 10,000 job cuts at Sun in the next two quarters regardless of what happens.

Apr 07 06:59 PM

[holmesnmanny:]

This has nothing to do with competing companies. If they merge, they are no longer competing. This isn't rocket science. What kind of logic is that?


On Apr 07 06:44 PM Benny Carlson wrote:

> Sun needs IBM like a hole in the head. They'd be as well going under
> as watching most of their IP being trashed by a competitor.

Apr 07 09:21 PM

[holmesnmanny:]

Absolutely. There is no good reason why Sun should not be selling. Their shareholders should be storming the board right now. They're getting screwed as the board isn't doing their fiduciary duty to sell at a great price to a strong company.


On Apr 07 06:59 PM Sun Down wrote:

> I guess you might not get it. The BOD at Sun was divided. JIS and
> his faction wanted their money, (JIS alone almost $30M.) There greed
> was almost amazing as his team destroyed Sun in three years. Scott
> did not want to sell out, despite having $150M+ on the table. There
> will be another 7,000 - 10,000 job cuts at Sun in the next two quarters
> regardless of what happens.

Apr 07 09:23 PM

[Alan Skoreyko:]

This deal needs to happen, period. Sun is floundering and the share price will tank again if this transaction is not completed.

Apr 08 05:38 AM

[Sherri S:]

Just watch.. if a deal makes sense to the public and makes sense for the stock, Sun will mess it up. They always do. I don't know if its the egos of the collective Board members or their bull headed fireball philosophy of McNealy and his cronies, but their overall decision making processes, sales and remarketing tactics and arrogance has been what has eroded their share price and marketability throughout the last decade. That is how they have taken a great product and continue to lose market share to HP and IBM. They need to do this deal or come to terms with who they really were and are today... the server for the dot.bomb era and go away! A merger with IBM is their only chance or the stock will see 4 before it ever sees 10. Sherri S.

Apr 08 10:05 AM

[MRZ:]

Based on news, the board unanimously rejected the offer, and that includes 2 members from SEM, they own 20+ % of the sun common...

If sun with revenue of 12B$ (includes 1B$ revenue loss for this year) is valued at 7B$.

As a comparison: Redhat with 0.5B revenue is valued at 3.5B by the market.

Sun valuation can change dramatically if the right cuts and optimizations are done. Even if they loose 5b$ of revenue they can have a market valuation larger than 7B$ that IBM offered.

Sun is on the right track, Solaris is doing well against Linux, Linux is trying to fight the loss of mind share in the storage space: lkml.org/lkml/2008/10/...... with technologies like: Java, XVM, Netbeans, MYSQL, Open Office combined with cloud services.... I see a good chance of Sun beeing worth a lot more than IBM offered in the not so distant future...

Nobody I know has a good opinion about IBM services, or IBM technologies like Websphere, developers around me are switching away from eclipse to netbeans...

Apr 08 11:09 AM

[MRZ:]

Based on news, the board unanimously rejected the offer, and that includes 2 members from SEM, they own 20+ % of the sun common...

If sun with revenue of 12B$ (includes 1B$ revenue loss for this year) is valued at 7B$.

As a comparison: Redhat with 0.5B revenue is valued at 3.5B by the market.

Sun valuation can change dramatically if the right cuts and optimizations are done. Even if they loose 5b$ of revenue they can have a market valuation larger than 7B$ that IBM offered.

Sun is on the right track, Solaris is doing well against Linux, Linux is trying to fight the loss of mind share in the storage space: lkml.org/lkml/2008/10/...... with technologies like: Java, XVM, Netbeans, MYSQL, Open Office combined with cloud services.... I see a good chance of Sun beeing worth a lot more than IBM offers in the not so distant future...

Nobody I know has a good opinion about IBM services, or IBM technologies like Websphere, developers around me are switching away from eclipse to netbeans...

Apr 08 11:09 AM

[A Close Obs...:]

OK, so I work at Sun. I have mixed feelings about the IBM deal falling through. On one hand, IBM buying the company was a quick way to take out the current, hopelessly incompetent senior management team. This needs to happen.

On the other hand, it was a very ham-handed way to carry out a management change. I understand that SEMA and KKR very justifiably lost faith in Jonathan's ability to show results, and they probably want their money out - even at a loss. A loss at this juncture is less risky than continuing to bet on Jonathan's complete lack of business acumen. Oh, sure, (his PR people say) he's a "visionary". But what Sun really needs is solid business leadership. Jonathan is simply unable to step up to this need. He needs to be replaced. Hopefully this will happen at today's board meeting.

Sun still has a tremendous amount of potential. But that potential won't last forever. If the Board doesn't act to bring hire an outsider with solid business sense before too long, the window of opportunity will close, and Sun will fade into history.

Apr 08 02:28 PM

[Seeking Tru...:]

secure2.thestreet.com/...

Apr 08 03:03 PM

[Seeking Tru...:]

Sun needs IBM? Some say it is the other way around:
secure2.thestreet.com/...

Apr 08 03:03 PM