IBM May Acquire Sun Microsystems

IBM may acquire Sun Microsystems for as much $6.5 billion (£4.5bn) in cash, a premium of more than 100 percent over Sun’s March 17 closing price of $4.97 a share.

The proposed deal — neither confirmed or denied by IBM and Sun — would give IBM a powerful market position in open-source Linux and Java software for Web application development, data storage, government systems and telecommunications.

The Wall Street Journal, which reported 18 March the two companies were in talks about a possible deal, said Sun had been shopping itself in recent months, including approaching IBM server rival Hewlett-Packard and Dell. If a deal is made for $6.5 billion, it would be IBM’s largest ever acquisition, eclipsing the $5 billion IBM paid for Cognos in 2007.

“It would certainly create a high tech juggernaut in the software and server business,” said Technology Research Research senior analyst John Spooner. “It’s an opportunity for IBM to take out a competitor and gain market share, particularly in open-source products.”

Both IBM and Sun build enterprise servers that use open source to operate without Microsoft’s Windows software or Intel’s microprocessor chips. IBM is the world’s largest server manufacturer with 31 percent of the market while the struggling Sun is in fourth place at 10.6 percent, trailing IBM, HP (29.5 percent) and Dell (11.6 percent).

“A deal would certainly give IBM a significant boost in open-source products,” Spooner said. “IBM would simply expand what Sun’s already doing.” Spooner added it wasn’t surprising Sun was seeking a buyer. “The bulk of Sun’s business comes from U.S. companies that aren’t really buying anything right now. IBM has plenty of cash.”

Roger Kay, president of Endpoint Technologies Associates, noted that Sun owns a lot of intellectual property with a “pretty good portfolio. IBM thinks it can do more with those assets than Sun. It seems like a pretty good fit and it seems to make sense.”

In November 2008 — stunned by a nearly $2 billion (£1.39bn) quarterly loss — Sun announced a massive restructuring of its business into three divisions that resulted in the cutting of up to 18 percent of Sun workers around the world. Under the plan, Sun collapsed its organization into three primary business units: Application Platform Software, Systems Platforms and Cloud & Developer Platforms.

Sun’s fourth quarter loss was a huge reversal from the same period in 2007, when the high-end hardware and software company reported an $89 million (£62m) profit.

“Sun is still fairly valuable,” Kay said. “Sun has not been particularly well positioned lately. IBM will create more outlets for Sun’s products.”

IBM would gain little in server hardware if it bought Sun, but analysts said there would be several benefits. IBM would capture Sun’s customer base, both in the high end and in the x86 space. In addition, getting Sun’s server business would bolster IBM’s capabilities in such areas as Solaris and Java. It also would help IBM in the growing data center competition with the likes of HP and Cisco.

IBM and Sun play in a lot of the same areas of the server business, from the high end with the Power and SPARC systems to the x86 space. These systems also touch on a host of other areas that will need to be taken into account, from services to software to processors.

Analysts said that, overall, the idea of IBM buying Sun makes sense, given recent moves by such competitors in the data center as Cisco Systems, with the announcement March 16 of its Unified Computing System initiative, and Hewlett-Packard, with its $13.9 billion (£9.7bn) EDS acquisition last year and its push to combine its data center and networking capabilities. Buying Sun would help IBM keep its leadership foothold in a part of the industry that is undergoing a lot of consolidation and change.

“There’s a huge land grab going on right now in the data center,” said Phil Hochmuth, an analyst with The Yankee Group. “It’s coming down to a battle over who’s going to build the super data centers of the future that enterprises are looking for. … It’s all moving to virtualization [and] a cloud-based strategy in the data center, and that is where all these companies are going.”

Given that scenario, IBM’s interest in Sun makes sense, Hochmuth said.

If it does buy Sun, IBM is going to be getting a server business that has been struggling for almost a decade, when businesses started moving away from large, expensive high-end systems to smaller and less-expensive x86 servers.

IBM and HP dominate a server market that, like most other aspects of the IT industry, is being hammered by the global recession. In the fourth-quarter 2008, IBM held a 33.4 percent share of the worldwide $13.1 billion (£9.2bn) server market; HP had 30 percent, according to research firm Gartner.

Sun was in fourth—Dell was third—with 9.6, and saw a 14.9 percent decline in revenue over the same quarter in 2007.

Most analysts expect that IBM would get rid of Sun’s high-end SPARC server business, most likely by selling it to Fujitsu, which with Sun already jointly offers a line of SPARC-based servers.

“I could see IBM selling off that server business, probably to Fujitsu, which relies heavily on Sun for servers,” said Josh Farina, an analyst with Technology Business Research.

However, while IBM probably would get rid of the high-end SPARC business, having those customers in-house would be a boon for Big Blue, said Yankee Group’s Hochmuth. It would increase the reach of IBM’s massive Global Services group, not only by having those customers to support, but also by offering services that enable the customers to migrate to IBM’s Power systems.

Joe Clabby, an analyst with Clabby Analytics, agreed.

“The secret is in how much business IBM does in Global Services supporting Sun customers in enterprise situations,” Clabby said. “Sun has typically passed that off to ‘partners,’ but IBM has a huge stake in supporting those companies. This is a good, continuing support revenue situation for IBM.”

In addition, gaining Sun’s high-end server business—as well as the x86 systems—would give IBM a platform of servers that run Solaris, which would be a big advantage, said IDC analyst Vernon Turner.

IBM would also benefit from gaining Sun’s SPARC chip development work, particularly with Sun’s CMT (Chip Multithreading) technology, said Farina, of Technology Business Research.

“[With its Power Architecture], IBM has focused on getting the clock speed up,” he said. “But with Sun, they’re more focused on thread levels and increasing the throughput. … There’s enough differentiation [in the chip technologies] one wouldn’t cannibalize the other.”

Sun also has a push under way to integrate solid-state disk memory throughout its server and storage lineups.

In the x86 server space, most analysts said IBM probably would simply absorb Sun’s business into its own Series x line.

Clabby said there is little in Sun’s server arsenal that IBM would keep.

“As for the technology advantage by assuming Sun’s hardware—practically nil,” he said.

But IDC’s Turner said that the value of Sun’s server business is less the hardware than what it brings with it, such as the customers and the integration with such technologies as Java and Solaris.

He also pointed out that Sun has a particular strength in the telecommunications space, which will continue to grow in prominence as vendors like IBM and others continue to push the idea of a “connected planet.” Having those customers in-house will be valuable to IBM.

Hochmuth agreed.“There’s a lot to keep,” he said. “Sun has a lot of core technologies that are important to a lot of enterprises, and there are a lot of synergies between those two companies, particularly [regarding] open-source [initiatives].”