Sun Microsystems (JAVA)

[eastunder]

For IBM, Not Acquiring Sun Is Likely Just A Minor Setback

By Jessica Hodgson
Of DOW JONES NEWSWIRES

http://ih.advfn.com/p.php?pid=nmona&cb=1239079045&article=37199229&symbol=N%5EJAVA


SAN FRANCISCO -(Dow Jones)- The breakdown of talks to acquire Sun Microsystems Inc. (JAVA) won't significantly set back International Business Machines Corp.'s (IBM) position in its hardware, software or services markets, though a deal would have given it useful technologies.

Over the weekend, The Wall Street Journal reported that Sun's board had rejected a formal offer from the Armonk, N.Y.-based technology giant. Talks had been going on for several weeks and the deal was initially pegged at close to $8 billion.

IBM and Sun spokespeople declined to comment on the developments. But a person familiar with the situation confirmed the talks had broken down.

The deal would have brought IBM a host of assets, including significantly bulking up its presence in high-end servers used at corporate data farms and brought its share of the market to 42% from 32%, according to IT research firm IDC. It also would have given IBM intellectual property, such as the Java programming language, that could be used to further the company's ambition of becoming a player in cloud computing, the growing practice of selling computing power to customers via the Internet.

Still, most analysts say IBM's interest in Sun was primarily opportunistic, rather than strategic. Santa Clara, Calif.-based Sun, once a Silicon Valley pioneer, has long found it difficult to make its cutting-edge technologies profitable and was looking for a strong corporate patron. While IBM may have benefited from combining with Sun - the deal would have been accretive at reported deal prices to both non-GAAP earnings and free cash flow, according to Citigroup Equity Research - IBM, which posted annual sales of $103.6 billion, will remain one of the IT industry's biggest players with or without Sun.

"We believe IBM will be able to maintain strong marketplace position without buying Sun," Tom Smith, an analyst with Standard & Poor's Equity Research, said in a client note Monday. "Passing on a potential deal leaves IBM shares attractive, in our opinion."

IBM's stock price was down 1.8% at $100.37 in mid-afternoon trading, tracking the broad technology sector. The company's shares are up 17.3% so far this year, while the S&P 500 is down 8.9%.

Sun shares were down almost 23% at $6.59.

Whether IBM needs to increase its presence in computer hardware, a business from which it has been withdrawing over the past decade, is an open question. The company gets more than 80% of its profits from its global services business and software. Sales of the high-end, proprietary servers IBM and Sun make are losing market share to cheaper servers based on Intel Corp.'s (INTC) ubiquitous X86 chips.

Some observers said IBM's failure to win Sun wouldn't seriously hamper the company's cloud-computing initiative. Cloud computing is seen as a key growth opportunity for IT companies and research firm Gartner Group forecasts the industry will grow 21.3% to $56.3 billion in 2009.

"Many of the things that are most interesting about Sun in the cloud-computing space are conceptual technologies which aren't necessarily businesses yet," said Eric Johnson, director of the Center for Digital Strategies at Dartmouth College's Tuck School of Business in Hanover, N.H. "Sun's been thinking about it longer and harder than IBM, but IBM can certainly do it without Sun."

Meanwhile, an acquisition of Sun would have posed a major integration challenge for IBM and would have come with a certain amount of antitrust risk as it would have combined two of the largest players in the computer-server market. While few analysts thought a deal would automatically be blocked, several anticipated a review process which could have resulted in IBM being required to divest some of its acquired assets.