Sun Board to Meet, Discuss Next Steps in IBM Acquisition Attempt

By Chris Preimesberger  |  Posted 2009-04-08 Print this article Print

Talks involving Sun's lawyers and executives -- including Chairman and co-founder Scott McNealy, CEO Jonathan Schwartz and the board members -- have been tabled since the weekend but will resume today. It is possible that a deal still can be reached; if so, it most likely will be at a lower price than was discussed on April 4.

After turning down a reported $7 billion offer to be acquired by IBM on April 4, Sun Microsystems' board of directors is scheduled to gather today, April 8, to discuss its next move, eWEEK has learned.

Talks between Sun lawyers and executives-including Chairman/co-founder Scott McNealy, CEO Jonathan Schwartz and the board members-have been tabled since the weekend but will resume today, according to an industry source with knowledge of the negotiations.

It is possible that the deal still can be accomplished; if so, it most likely will be at a lower price than was discussed on April 4. Sun's common stock price has fallen some 25 percent since the talks were cut off. It closed at $6.28 on April 7.

IBM's last offer was for a reported $9.40 per share. It has not been confirmed if the offer stands because IBM has yet to publicly acknowledge the impending deal.

If the deal is not accomplished, analysts have told eWEEK, a shareholder revolt could take place, bringing with it possible lawsuits.

The report from the April 4 meeting is that the board was divided between a majority faction, including Schwartz, that favored the acquisition, and a group led by McNealy, who were against it. Sharp disagreements between Schwartz and McNealy and other members of the board punctuated the meeting. With tempers at a high level and a stalemate at the table, a decision was made to call off the negotiation process with IBM.

The main issues were overall price ($7 billion, thought to be too low by most of the board) and assurances that IBM would continue full legal support of Sun once the deal was signed, in the event of future antitrust lawsuits and other legal issues. IBM apparently has not given those assurances.

One example: Sun has a lawsuit in the courts since 2007 against NetApp contesting the origin of the open-source ZFS (Zettabyte File System) for storage data transfer. The speedy file system now is being used in thousands of enterprise systems, and if Sun were to lose that IP case, it could cost the company millions of dollars in court costs, penalties and licensing fees.

Then there is the federal Securities and Exchange Commission, which could investigate the impending deal for antitrust problems. A combination of IBM and Sun would represent about two-thirds of all high-end data server sales.

Antitrust Issues a Deal-Breaker?

"Antitrust issues appear to be the deal breaker here, and what price premium that IBM is willing to pay to see this through all of the government paperwork," wrote Enterprise Strategy Group analyst Brian Babineau in his blog.

"Yes, a combination of the companies would lead to a 'monopoly' on high-end servers, but who cares?  Many IT shops have done away with high-end servers, choosing to go with more modular mid-range smaller solutions," Babineau wrote.

Meanwhile, on April 7, Schwartz addressed Sun employees with an internal video message that side-stepped talk about the acquisition and reassured them that Sun's commitment continues to be "in the best interests of customers, shareholders, and employees." The message puzzled some people. See eWEEK's Storage Station blog for details.

A number of industry experts believe Sun should accept a reasonable offer from IBM.

The Santa Clara, Calif.-based company has been losing money for nearly a decade. 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 also behind the curve in the data storage market, lagging behind the more-established EMC,  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 the next quarterly report, set for April 27.

eWEEK will continue to monitor the situation until a final decision is reached on the buyout.

Chris Preimesberger Chris Preimesberger was named Editor-in-Chief of Features & Analysis at eWEEK in November 2011. Previously he served eWEEK as Senior Writer, covering a range of IT sectors that include data center systems, cloud computing, storage, virtualization, green IT, e-discovery and IT governance. His blog, Storage Station, is considered a go-to information source. Chris won a national Folio Award for magazine writing in November 2011 for a cover story on and CEO-founder Marc Benioff, and he has served as a judge for the SIIA Codie Awards since 2005. In previous IT journalism, Chris was a founding editor of both IT Manager's Journal and and was managing editor of Software Development magazine. His diverse resume also includes: sportswriter for the Los Angeles Daily News, covering NCAA and NBA basketball, television critic for the Palo Alto Times Tribune, and Sports Information Director at Stanford University. He has served as a correspondent for The Associated Press, covering Stanford and NCAA tournament basketball, since 1983. He has covered a number of major events, including the 1984 Democratic National Convention, a Presidential press conference at the White House in 1993, the Emmy Awards (three times), two Rose Bowls, the Fiesta Bowl, several NCAA men's and women's basketball tournaments, a Formula One Grand Prix auto race, a heavyweight boxing championship bout (Ali vs. Spinks, 1978), and the 1985 Super Bowl. A 1975 graduate of Pepperdine University in Malibu, Calif., Chris has won more than a dozen regional and national awards for his work. He and his wife, Rebecca, have four children and reside in Redwood City, Calif.Follow on Twitter: editingwhiz

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