Sun’s Board Mulls Next Steps In IBM Deal

After turning down a reported $7 billion (£4.8bn) offer to be acquired by IBM on 4 April , Sun Microsystems’ board of directors is scheduled to gather today to discuss their next move, eWEEK has learned.

Talks between Sun lawyers and executives — including Chairman and co-founder Scott McNealy, CEO Jonathan Schwartz and the board members — have been tabled since the weekend but will resume today, according to a industry source with knowledge of the negotiations.

It is possible that the deal still can be accomplished; if so, it most likely will be at a lower price than was discussed on April 4. Sun’s common stock price has fallen some 25 percent since the talks were cut off. It closed at $6.28 on April 7.

IBM’s last offer was for a reported $9.40 (£6.40) per share. It is not known if the offer still stands.

The report from the 4 April meeting is that the board was divided between a majority faction, including Schwartz, that favored the acquisition, and a group led by McNealy, who were against it. Sharp disagreements between Schwartz and McNealy and other members of the board punctuated the meeting. With tempers at a high level and a stalemate at the table, a decision was made to call off the negotiation process with IBM.

The main issues were overall price ($7 billion, thought to be too low by most of the board) and assurances that IBM would continue full legal support of Sun once the deal is signed, in the event of future antitrust lawsuits and other legal issues. IBM apparently has not given those assurances.

One example: Sun has an lawsuit in the courts since 2007 against NetApp contesting the origin of the open-source ZFS (Zettabyte File System) for storage data transfer. The speedy file system is being used in thousands of enterprise systems, and if Sun were to lose that IP case, it could cost the company multiple millions of dollars in court costs, penalties and licensing fees.

Then there is the Security and Exchange Commission, which could possibly investigate for antitrust problems. A combination of IBM and Sun would represent about two-thirds of all high-end data server sales.

“Anti-trust issues appear to be the deal breaker here, and what price premium that IBM is willing to pay to see this through all of the government paperwork,” wrote Enterprise Strategy Group analyst Brian Babineau in his blog.

“Yes, a combination of the companies would lead to a ‘monopoly’ on high-end servers, but who cares? Many IT shops have done away with high-end servers, choosing to go with more modular mid-range smaller solutions,” Babineau wrote.

Meanwhile, on 7 April, Schwartz addressed Sun employees with an internal video message that side-stepped talk about the acquisition and reassured them that Sun’s commitment continues to be “in the best interests of customers, shareholders, and employees.”

A number of industry experts believe Sun should accept a reasonable offer from IBM.

The Santa Clara, Calif.-based company has been losing money for nearly a decade. The old-line Unix installed server market has been eroding for a decade, the high-end workstation market certainly has shrunk and won’t be back, and the open-source software business has yet to provide the big service-related profits that looked so promising a few years ago.

The company, although it has high-quality products, is also behind the curve in the data storage market, lagging behind the more-established EMC, Hewlett-Packard, NetApp—and even Dell—in overall sales. Dell entered the storage market a couple of years after Sun, yet has grown its revenues more quickly through the midmarket.

Sun is expected to announce another billion-dollar loss in the next quarterly report, set for 27 April.

eWEEK will continue to monitor the situation until a final decision is reached on the buyout.