Google may not be buying Twitter, but IBM may be closing in on its rumored Sun Microsystems acquisition for about $7 billion. The companies have reportedly been in negotiations for several weeks on a deal that would propel IBM into the lead in the Unix market.
The New York Times cited people familiar with the matter as saying IBM is willing to pay $9.50 a share. That's down from $10 reported earlier and a near-100 percent premium on Sun's value before the acquisition rumors began in March.
If IBM acquires Sun, it will inherit a large software portfolio from a former rival that includes the Solaris operating system, the open-source MySQL database, the Java programming language, and SPARC chips. Sun is also a market leader in server sales.
The Sun Fire Sale
The IBM-Sun deal would be an unusual merger, according to Dana Gardner, principal analyst at Interarbor Solutions. In fact, he added, merger may not be the right word. He called it a "fire sale acquisition" of a company whose time ran out in the midst of an economic downturn.
"IBM is really looking at the equivalent of a rummage sale. IBM will pick over the parts, keep the ones that make some sense, and discard the others," Gardner said. "From IBM's perspective, the combination of removing competition and gathering market share and products probably adds up to the aggregate $4.3 billion that they will be paying."
Although the acquisition cost that's being reported is about $7 billion, if you subtract Sun's $2.7 billion in assets, Big Blue would only pay about $4 billion. Given the amount of cash IBM has on hand, along with its $100 billion in annual revenues, the company isn't looking at any debt obligations.
Managing Antitrust Concerns
"If this acquisition happens, it's a rather sad outcome for Sun. Over its illustrious period it very much had a spirited legacy of thumbing its nose at the likes of IBM and then later Microsoft and HP," Gardner said. "So it's sad for Sun in the history books, but it's even sadder for the thousands or perhaps tens of thousands of employees that are going to be losing their jobs."
IBM may have to jump through some regulatory hurdles to close the deal. Specifically, antitrust regulators may investigate, given IBM's already large Unix market share. A Sun acquisition would give Big Blue about 60 percent of the high-end Unix market.
"I suppose given the size of what IBM is getting here, that if that became an antitrust issue, that IBM could spin off the Unix business from Sun and sell it to someone like Fujitsu, which would still allow the majority of this deal to go through but ameliorate antitrust concerns," Gardner said. "Given that the Unix market is not in a growth mode by any stretch, that wouldn't really hurt IBM's strategy. It would just be one less part of the rummage sale to manage."