Why Sun Had Better Have a Solid Backup Plan

Sun Microsystems had better have something else up its corporate sleeve.

History is written so it can repeat itself. It was less than a year ago, on Aug. 1, 2008, that Eric Jackson, president of Ironfire Capital, an investment fund that owns 3.2 million shares of Yahoo, told eWEEK after the company spurned a $47 billion buyout bid from Microsoft: "We overplayed our hand with Microsoft. Yes, it would have been a great deal for the shareholders and for the company. We should have taken the deal."

Will Sun's shareholders be saying something similar after the company reportedly rejected a $7 billion takeover offer from IBM on April 4? Several industry sources had told eWEEK that the deal was set to be announced today, April 6.

In the case of Yahoo, co-founder and CEO Jerry Yang was forced out as CEO a few months later, and the board of directors was overhauled as Yahoo's stock price fell and shareholders grew impatient.

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Short of having a backup deal in the company's hip pocket, this may be what will happen to Sun CEO Jonathan Schwartz and the company's board of directors, headed up by Sun co-founder and chairman, Scott McNealy.

In fact, there was a serious division of opinion about the deal at the board meeting on April 4, and it appears that McNealy -- who owns a lot of stock and is well-known for being a stubborn person to deal with -- and his followers won the debate. Sun's board, and Schwartz's credibility, now may be broken. For more on this angle, read my colleague John Pallatto's analysis.

Sun has been losing too much money for too long a time—ever since the bubble breakage of 2000. The old-line Unix installed server market has been eroding for a decade, the high-end workstation market certainly has shrunk and won't be back, and the open-source software business has yet to provide the big service-related profits that looked so promising a few years ago.

The company, although it has high-quality products, is behind the curve in the data storage market, lagging behind the more-established EMC, IBM, Hewlett-Packard, NetApp—and even Dell—in overall sales. Dell entered the storage market a couple of years after Sun, yet has grown its revenues more quickly through the midmarket.

Sun is expected to announce another billion-dollar loss in this next quarterly report, so this past weekend's news isn't going to sit well with those folks holding Sun stock.

It appears that it can ill afford to turn down a relatively low but still sane offer—about $7 billion, or about $9.40 per share—from IBM, a financially healthy company that invented the IT business. On March 17, one day before the IBM overture first became public, Sun's stock price was a notch below $5. It was up almost 80 percent a day later and has stayed up, plainly indicative of the investing public's opinion about the takeover possibility.

The only theory that makes sense at this time is that Sun and its board may have another offer on another table—one perhaps from cash-rich Cisco Systems, or another from a coalition of Hewlett-Packard and Oracle, as was reported to eWEEK on March 24.

Apparently only a short time ago, the latter two companies got together and tendered a joint offer to purchase Sun. Oracle wanted the software side—MySQL, Java, ZFS, Solaris, OpenOffice.org, everything—and wrote an offer for about $2 billion for it.

HP, looking at a formidable new challenge from Cisco in the data center systems market, wanted to haul away all the hardware (storage, servers, SunRay virtual desktops, switches, etc.) for another $4 billion to $5 billion.

But Sun, which apparently had been shopping itself around to other companies—ironically, including HP—was able to say, "No thanks, we have another offer." From IBM, of course. Now that situation apparently has gone south, and things have turned on a dime.

Cisco could buy Sun outright today and gain substantial automatic market share in the telecom, government, and high-performance computing and data center-outfitting business, which is exactly where it wants to be.

Oracle multibillionaire Larry Ellison also could add Sun to his personal kingdom with a couple of checks if he wanted to. If he and HP CEO Mark Hurd have teamed up because they thought Sun was about to go to IBM too cheaply—which is what a number of industry observers believed—then it is possible there is some other deal that is about to be unveiled.

If there isn't, then life is going to be hellish for Schwartz, the board of directors and Sun in general. Just ask Jerry Yang and his own board folks.