Report Says IBM Done With Sun

The Wall Street Journal is reporting that merger talks between Sun Microsystems
and IBM have collapsed, placing the potential $7 billion deal in jeopardy.

The WSJ reported that Sun officials felt that IBM’s offer of $9.40 a share or
less was too low and that IBM had too much leeway to walk away from the deal, which could
face substantial
antitrust issues
in the Unix server and mainframe storage markets.

The two sides could still work out a deal, but the Journal reported that Sun
has sent a notice terminating IBM’s agreement for exclusive negotiations, while IBM has
withdrawn its offer to buy Sun. The two sides apparently remain in touch by phone,
however.

Sun has made
strides
to reduce its losses and is in the middle of a restructuring
to improve its financial position.

Sun ended 2008 with $2.64 billion in cash and $1.26 billion in debt, so it appears to
have some time even with the difficult economy. The company burned through $113 million
in the fourth quarter. It will release its first-quarter results on April 28, and at
least one analyst firm – Wedge Partners – believes the quarter was a tough one for
Sun.

But the near-merger could raise questions in customers’ minds about Sun’s viability
and future that the company will need to address to reassure its customer base.

Sun shares have gained more than 60 percent since rumors of the takeover talks leaked,
so they will likely be under some pressure when Wall Street opens for business on Monday.
Neither side ever officially confirmed the talks. Sun is believed to have no other
prospective suitors, as the company reportedly sought bids from other large IT companies
after IBM expressed an interest but found no takers.

The Journal reported that Sun’s board is split over the proposed deal, with Sun
chairman and co-founder Scott McNealy leading the opposition, and CEO Jonathan Schwartz
heading the side in favor of the merger.

Enterprise Strategy Group analyst Brian Babineau said the fallout reminded him of the
failed merger negotiations between Microsoft and Yahoo a year ago.

“Sun is playing the role of Yahoo right now,” Babineau said. “I can’t imagine
shareholders will be excited.”

On the other hand, the deal’s collapse could be good news for Sun OEM partners, such
as Hitachi Data Systems (HDS) and Dot Hill, and IBM partner NetApp, but NetApp also faces
the uncertainty of a patent dispute with Sun
over the ZFS file system. LSI is an OEM partner of both companies and thus would appear
to be less affected either way, although Babineau pointed out that a merger could mean
fewer SKUs for LSI to support and thus lower costs.

This story originally appeared on Enterprise Storage Forum.

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