Wednesday, March 18, 2009

ibm buying sun

International Business Machines Corp. is in talks to buy Sun Microsystems Inc., taking out a smaller rival to gain a greater share of the computer-server market, according to a person familiar with the situation.

The purchase would give IBM access to customers loyal to the Sun brand, according to the person, who declined to be identified because the talks are private. IBM may pay at least $6.5 billion, the Wall Street Journal said today, valuing Sun at almost twice its $4.97 closing price yesterday. Sun shares advanced as much as 86 percent.

IBM Chief Executive Officer Sam Palmisano is going after acquisitions to build up the computer-services provider amid the worst economic slump in more than a quarter-century. Buying Sun would give IBM the scope to compete more effectively for customers as corporations curb spending, Morningstar Inc. analyst Rick Hanna said.

“It all has to do with scale, because at the end of the day, there’s only so much of the pie that you can have,”, said Hanna, who is based in Chicago. “Sun was ripe for consolidation just because it lacked scale to really sustain its investment.”

Sun counts General Electric Co. and General Motors Corp. among its customers. Servers, which run networks and Web sites, account for almost half Sun’s total sales, and the global market topped $50 billion last year. Last quarter, server sales declined 14 percent, the largest drop since the aftermath of the dot-com bust, as customers held off on buying both costly and inexpensive systems amid the worst contraction in economic growth since 1982.

Bolstering Software

The acquisition of Sun also would help IBM fuel growth in software, its most profitable business. Sun’s Solaris operating system, which competes with Linux programs and Microsoft Corp.’s Windows, runs computers and data centers.

“The potential crown jewel in Sun’s technology portfolio actually is software -- their Solaris operating system, which next to Linux probably has the broadest footprint in terms of being able to run on IBM’s largest mainframes down to a smaller server,” Hanna said.

Palmisano said last week he planned to “go on offense” during the recession, pursuing acquisitions and investing in research. Sales in IBM’s systems and technology business, which encompasses the company’s semiconductor design, servers and storage products, declined 20 percent last quarter from a year earlier.

Both companies are seeking growth in areas such as cloud computing, where providers rent out computing and storage space so customers don’t have to buy their own equipment. Last month, Armonk, New York-based IBM created a separate division to focus on that business. Sun plans to introduce its own Sun Cloud Compute service over the Internet this year.

‘Valuable Assets’

“Sun has many valuable assets, many of which may not been fully exploited within Sun itself,” said Shannon Cross at Cross Research in Livingston, New Jersey, who advises investors to hold the shares. “It was going to happen at some point, with Sun trading where it was.”

Sun rose $4.06, or 82 percent, to $9.03 at 12:13 p.m. New York time in Nasdaq Stock Market trading, the most in more than 20 years. IBM dropped $2.16 to $90.75 on the New York Stock Exchange.

The Wall Street Journal said a deal could be announced this week, at a price of $10 to $11 a share. IBM representative Ron Favali declined to comment. Sun spokeswoman Karen Kahn, who declined to comment on the deal earlier, didn’t immediately return a second call on the possible value of an offer.

Global Server Sales

Buying Sun Microsystems would boost IBM’s share of global server sales by 9.6 percentage points to 43 percent, widening the lead over Hewlett-Packard’s 30 percent, according to fourth- quarter estimates at Credit Suisse Group AG today.

Dell Inc. ranked third in the industry with a share of 10.7 percent, followed by Sun and Fujitsu Ltd., according to the report. Global sales of computer servers will probably fall 17 percent to $44.2 billion this year as the global recession drives down demand and prices, according to the Credit Suisse report.

Analysts on average project Santa Clara, California-based Sun, the fourth-biggest maker of servers, will post its third straight quarterly loss as the recession crushes corporate demand. Chief Executive Officer Jonathan Schwartz is trying to weather that by slashing as many as 6,000 jobs and offering lower-priced products.

IBM has spent $9.3 billion on at least 35 software companies since Palmisano took over in 2002. That spree has helped boost software sales 37 percent since 2004, and the company trails only Microsoft and Oracle Corp. in software products. IBM had $12.9 billion in cash and marketable securities at the end of last year.


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