Collapse of IBM/Sun deal could leave Sun without a suitor, analysts say

Sun Microsystems may find itself without any viable suitors if it does not come to terms with potential acquirer IBM, some industry analysts believe.

Sun has rejected an offer from IBM as too low, according to the Wall Street Journal. With IBM reportedly offering an 80% premium over Sun's actual stock price, it would be “pure insanity” for Sun to turn down the offer, says Enterprise Strategy Group analyst Brian Babineau.

Sun has struggled financially since the dot-com bubble burst, and its predicament has only been made worse by the current recession. IBM may be alone in having interest in all of Sun's various product lines, including storage, servers, database software, Java and IT services, Babineau says.

“IBM has a nearly perfect alignment with most of Sun's businesses,” Babineau says. “I don't think that anybody [other than IBM] would buy the whole company.”

HP might consider buying Sun, but is still busy integrating newly acquired EDS, which is no small task, says Patrick Becker Jr., chief investment officer at Becker Capital Management.

“It's a pretty shallow pool” of companies that would want to buy Sun, Becker says.

There is still time for IBM and Sun to work out a deal, Becker notes. But if Sun rejects IBM's buyout offers, he says the company risks going down the same path as Yahoo, which has struggled on Wall Street and undergone a leadership change since rejecting an offer from Microsoft a year ago.

While Babineau and Becker are skeptical that anyone other than IBM might want to buy Sun, Pund-IT analyst Charles King is a bit more bullish on Sun's value. Buying Sun may not make sense for HP, because Sun still relies heavily on UltraSparc processors and HP has tried to move away from proprietary processor architectures, King says. But Dell could be interested in buying Sun's high-end server lines in order to shed a reputation of being an x86-only house, King says.

If no single vendor steps forward to purchase Sun, the possibility of a carve-out plan in which each business unit is sold to a different company remains. EMC or NetApp might want Sun's storage business, while HP or Dell could snatch up the server line, Babineau speculates. Sun's database software could go to Microsoft or Oracle.

Selling Sun piece by piece would be complicated, but could be the only option remaining if the IBM deal doesn't work out, Babineau says. The process could end with Sun ceasing to exist, or existing as a smaller company focused on just one business line.

Splitting up a company in this manner raises the challenge of trying to prove the value of each business line, King notes. Even something like Java, which has broad reach throughout the IT industry, could be tough for Sun to sell because the company has not made a fortune in this area yet, he says.

“I'm not sure that the business case for Java exists quite yet,” King says, adding that “I'm not sure a fire sale would really be particularly good for the company.”

The last couple years for Sun have been particularly rough, as big Sun customers in the telco and financial markets have been hit hard, King says.

“I think the problem they've been having the last several years is finding a way they can be both profitable and maintain an innovative, competitive edge at the same time,” he says.

Sun has already had severe layoffs and cutting more personnel could be risky even if it saves money in the short term, King adds.

The Sun franchise will still have value, even if it does not get acquired, Becker says. “They're not going to be what they once were, that's for certain,” but Sun has many loyal hardware customers who are due for system upgrades, he says.

If no acquisition surfaces, Babineau predicts turmoil within Sun, perhaps even “shareholder revolt,” leading to changes in executive leadership. Many shareholders are also employees, who might be anxious to cash in their stock at the 80% premium offered by IBM.

Babineau said he'd feel sorry for Sun employees who helped the company build up a broad technology portfolio yet “were subject to some poor management decisions, including this debacle.”