Sun made colossal mistake on IBM’s offer, analysts say

With IBM/Sun negotiations reportedly at a standstill, a consensus seems to be emerging among industry analysts: Sun has made a colossal mistake in turning down IBM's $7 billion acquisition offer.

“My first thought was, IBM threw Sun a rope. They used it to make a noose,” Annex Research analyst Bob Djurdjevic writes in an e-mail.

IBM/Sun merger talks collapsed after “disputes over millions of dollars of payout to Sun executives, in addition to the takeover price and conditions attached to the deal,” the Bloomberg news service reported Monday.

“If it is indeed true that the Sun Board turned down the IBM offer because they thought a 100% premium on the value of their listing ship was too low a price in the midst of an economic storm, then Sun deserves to go down,” Djurdjevic says. “And to go down in the history of IT as yet another company that let pride get in the way of good judgment.”

“Pure insanity” is the phrase used by Enterprise Strategy Group analyst Brian Babineau to describe Sun turning down the premium offered by IBM.

While Sun has many interesting technology divisions, including servers, storage, Java and other software, the company has consistently failed to turn a profit and analysts are largely pessimistic that it can execute a successful turnaround on its own.

Analyst Judith Hurwitz notes in her blog that rumors have Sun Chairman and co-founder Scott McNealy taking the company over from current CEO Jonathan Schwartz. It worked for Steve Jobs and Apple, but Sun has failed to gain leadership roles in both the hardware and software markets and probably will not have a good future as an independent company, she writes.

According to Bloomberg, Schwartz and McNealy both have contracts guaranteeing them three times their annual pay in salaries and bonuses if Sun is acquired. IBM did not want to make such payments to the executives, Bloomberg reported, citing anonymous sources. Sun objected to IBM wanting too much control over Sun's projects and employees before the closing of a deal, and wanted greater assurance from IBM that it would complete the transaction even if it faced antitrust review, Bloomberg reported.

Sun has not commented about the rumored acquisition but issued a statement to Reuters saying the company “is committed to its leadership team, growth strategy and building value for its shareholders.”

Despite Sun's reassurances, Babineau speculated that the failed talks could lead to a Yahoo-esque “shareholder revolt” in which investors force Sun to make leadership changes.

Shareholder-filed lawsuits are a possibility if Sun can't turn itself around, other analysts were quoted as saying in a San Francisco Chronicle story.

“We question management's ability to do a successful turnaround on their own,” Bill Kreher, a technology analyst with Edward Jones, told the Chronicle. “The transition is challenging and is taking longer than expected.”

Network World readers weighed in on the failed IBM/Sun talks as well, speculating that companies such as Cisco, Oracle or Apple might be interested in purchasing Sun.

“With the amount of flirting Cisco has been doing beyond their core traditional networking technologies of late, it would seem in my eyes that the acquisition of Sun by Cisco would be a logical one and would bring Cisco on a par with HP, IBM and Dell in one fell swoop,” one reader said in response to the Network World story “Collapse of IBM/Sun deal could leave Sun without a suitor, analysts say.”

One reader called Sun a “great company with bad marketing.” Another reader said it's too easy to blame marketing and sales for the failures of a technology company.

“'Great products is the engineering way of thinking 'If we build it, they will come,'” the reader commented. “Doesn't work in baseball either. Silicon Valley is littered with the carcasses of ‘great product' companies that didn't offer real value to customers.”