Analysts Claim IBM Still Sun’s Best Option

In the end, the move that makes the most sense for Sun Microsystems would be to be acquired by IBM.

That’s according to analysts who have been watching the rollercoaster negotiations in IBM’s attempts to buy Sun for somewhere in the neighborhood of $7 billion (£4.8bn). IBM reportedly pulled its offer from the table 4 April after concerns from Sun executives over price.

It essentially comes down to the fact that Sun is losing a lot of money—about $209 million (£142m) in the fourth quarter 2008, with more expected in the first quarter 2009—and is losing ground in a server market that itself is contracting, thanks to the global recession.

Given all that, the list of possible suitors for Sun is small, and among those, IBM offers the best chance at the highest price.

“The only way it makes sense to buy Sun—which is really a server vendor—is as a consolidation play,” said John Rymer, an analyst with Forrester Research. “You’re trying to grab volume and add to what you already have.

That is why analysts such as IDC’s Matt Eastwood say they expect negotiations between the two technology giants to continue, despite the reports that the deal died over the weekend.

“There really aren’t that many companies in IT that are both able to digest Sun and monetize them, and are willing to do that,” Eastwood said.

And the executives running Sun are smart enough to understand that, given the changing landscape and the global recession that is only complicating its efforts to say afloat, the idea of continuing on as a separate entity is not a viable option, analysts said.

“Negotiations will go on … despite the seriously aggressive tactics by Sun complicating the deal. Both sides have already committed a lot of resources to this,” Eastwood said, adding that after IBM, there aren’t that many vendors lining up to take Sun. “I don’t think Sun wants to be left out there on their own.”

Sun reportedly has been shopping itself around for months. News reports have said that Sun executives turned down a possible $2 billion (£1.36bn) deal that would have split up the company between Hewlett-Packard and Oracle. Sun executives apparently rejected that deal and instead turned their attention to IBM.

Another name that has been circulated as a possible Sun buyer is Cisco Systems, a financially healthy company with plans to extend its presence in the data center beyond just the networking layer. Cisco March 16 unveiled its Unified Computing System initiative, which includes offering its own blade servers as well as partnerships with such companies as VMware and EMC.

But Forrester’s Rymer said that doesn’t really make sense. There isn‘t much that Cisco would want from Sun beyond the hardware engineering expertise. There is Sun’s software, but it’s not a huge part of Sun’s overall business. In addition, Cisco’s interest in software seems to be in hosted software, and Cisco hasn’t tried to expand its software offerings in the past.

“Cisco could have bought BEA [Systems], but they didn’t,” Rymer said. “They passed on it.”

Oracle bought BEA in January 2008 for about $8.5 billion (£5.77bn).

Rymer said he sees three possible scenarios, with the first one being that IBM buys Sun, despite such concerns as the price and IBM’s reported questions regarding how Sun licenses its software.

“These are surmountable problems,” he said.

The second possibility would be for HP and Oracle to follow through on their bid, which would essentially dismember Sun, with Oracle taking the software and HP the hardware.

The last possibility would be for co-founder and former CEO Scott McNealy to come back in to lead the company. McNealy, who is chairman of Sun’s board of directors, reportedly led a faction of board members against the deal being brokered by CEO Jonathan Schwartz.

“At this point, Jonathan Schwartz’s job is to get the highest price for Sun,” Rymer said. “If that doesn’t happen, he’s gone.”

There has been precedence in the past of former CEO’s returning to their companies, with mixed results. David Duffield returned to enterprise applications maker PeopleSoft before it was bought by Oracle, Rymer pointed out. In addition, Michael Dell at Dell, Steve Jobs at Apple and Ted Waitt at Gateway all came back in hopes of turning around their companies’ fortunes.

“Only one [of those options]—and it seems like a long shot—means that Sun remains independent,” Rymer said.

Given that, Sun needs to look for the best deal, and that would lie with IBM, he said. It would mean the best price, and it also would mean—given IBM’s history of sustaining products over long periods of time, albeit usually its own products—that Sun customers could expect to hang onto their systems for a longer period of time, with the pressure to change to new products immediately.