IBM in Talks to Buy Sun

IBM is in talks to buy Sun Microsystems, sources with knowledge of the matter said, a move that could bolster the technology giant against rivals in the high-end computer server market.

International Business Machines (NYSE: IBM) is offering to pay at least $6.5 billion, or double Sun’s Tuesday closing price of $4.97, The Wall Street Journal reported online earlier. Shares of Sun (NASDAQ: JAVA) jumped 64 percent in pre-market trading to $8.16, while IBM shares fell 2 percent to $90.89.

If they reach a deal, it would be IBM’s largest-ever acquisition, and represent a departure from its recent strategy of focusing on deals to strengthen its software and services businesses, rather than hardware.

Analysts saw the talks as part of a consolidation trend, as Hewlett-Packard, IBM and Cisco Systems jostle for control of corporate datacenters and compete to supply the high-end computers that power complex corporate transactions and networks.

“It makes sense in an industry consolidation view, but looking at Sun’s performance over the last couple of years, it’s not one of my top picks for IBM to buy,” said Jyske Bank analyst Robert Jakobsen, speaking from Denmark.

“Having said that, there’s clearly a huge synergy combining these two companies,” he said. “The market hasn’t been kind to Sun Microsystems in the last 12 months. So it’s not an expensive acquisition in my view.”

Sun, which was not available for comment, has long been cited as a takeover target for IBM, HP, Dell or Cisco (NASDAQ: CSCO), which introduced a comprehensive set of datacenter products earlier this week. Bankers have said Sun has been searching for a buyer in recent months.

But the challenge of valuing Sun’s intertwined software, hardware and services businesses could put off potential buyers, analysts say. Sun has never fully recovered from the dotcom bubble burst in the early 2000s, when demand for its servers cratered.

IBM, which had nearly $13 billion in cash at the end of $2008, declined comment. Its largest acquisition to date is the $5 billion purchase of Canadian software maker Cognos in 2008.

The Wall Street Journal said HP (NYSE: HPQ) had declined to buy Sun, citing a person briefed on the matter.

Tech spending cuts

IBM was the top supplier of servers in the fourth quarter, with a market share of 36.3 percent, according to market researcher IDC. HP has 29.0 percent, followed by Dell with 10.6 percent, Sun with 9.3 percent, and Fujitsu with 4.2 percent.

These five server vendors all posted declines in their fourth-quarter server revenue, hurt by pullbacks in corporate spending on technology due to the weak global economy.

IBM’s move, as well as Cisco’s announcement on Monday, may signal a new wave of partnerships and acquisitions in the datacenter market as companies strive to provide more comprehensive products and services to their customers.

Cisco’s move could put into play data equipment maker Brocade Communications Systems, infrastructure software maker Citrix Systems and niche network optimization companies, such as Blue Coat Systems and Riverbed Technology, analysts said.

“IBM wants to become a one-stop shop for all IT related offerings, whether it is hardware, software services or solutions,” Avinash Vashistha, chief executive at IT consulting firm Tholons. “They have been executing this strategy for the last few years and with the Sun deal, they will only accelerate that move.”

Sun, whose name stands for Stanford University Network, rose to prominence in the 1990s when start-ups flocked to its high-end computers, which run on its Solaris operating system and have been widely used in the financial services industry.

When the Internet bubble burst in 2000-01, funding for start-ups dried up along with much of the demand for Sun’s computers.

Sun has tried to reinvent itself by offering more services and software, and expanding production of Linux-based computers, which tend to be cheaper. But that failed to revive its stock price. The company is shedding up to 6,000 jobs, or 18 percent of its workforce.

Sun shares are down 71 percent in the last year, a far cry from an all-time high of $258.75 during the dotcom boom.

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