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    Pride Trumps Good Sense in IBM-Sun Talks

    By
    John Pallatto
    -
    April 6, 2009
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      At first it looked like IBM pulled the plug on the deal by lowering its buyout offer and as a result giving Sun an offer it just had to refuse. But the news reports from Reuters, the Wall Street Journal and other news services presented conflicting views of the situation.

      Reuters has reported that IBM offered as much as $9.55 a share for a total of $7 billion to acquire Sun. As the business day closed on April 3, the word was the IBM was going to announce an acquisition agreement on April 6.

      Then Reuters reported on Saturday that IBM had cut its offer from to $9.50 from $9.55, but that two companies were still on track to announce a purchase agreement. Then Sunday afternoon the Wall Street Journal, Associated Press and Reuters reported that the buyout talks collapsed after Sun rejected IBM’s offer of $9.40 a share. It’s hard to say for sure what really happened because neither IBM nor Sun has confirmed publicly that the talks have ended or explained why they failed. In fact, they had declined to comment publicly about whether they were even talking.

      Read more about why the IBM-Sun talks stalled here.

      It’s hard to imagine that Sun and IBM would allow the talks to fail over a matter of 15 cents per share. What’s a few million dollars more or less in a $7 billion buyout deal?

      The latest report from the Wall Street Journal suggests the deal failed because of a conflict on Sun’s board of directors, with a faction led by CEO Jonathan Schwartz favoring the deal and a faction lead by founder and Chairman Scott McNealy against it. The McNealy faction prevailed.

      The decision immediately raises the issue of whether Schwartz will long remain as Sun CEO, since he apparently pushed for the buyout talks and favored the IBM deal. He may find that his position as Sun CEO is now untenable.

      What seems more likely is that Sun-which reportedly has been shopping itself around since it reported a $2 billion loss in November 2008 and announced a massive corporate restructuring-hopes there are other ardent suitors waiting in the wings.

      When word leaked out that IBM was courting Sun, rumors soon followed that Sun had rejected a joint offer from Hewlett-Packard and Oracle, which would have resulted in the two buyers dismembering Sun, with its hardware assets going to HP and the software going to Oracle.

      But it hardly seems likely that Sun stalwarts would find the prospect of in effect getting sent to the IT rendering plant very attractive unless they were offered a lot more money.

      Even Dell, a relative latecomer to the server market, was said to be in the running. But none of these options seems very attractive unless Sun is getting downright desperate.

      Still Trying to Recover from the Dot-com Meltdown

      Sun has been trying for nearly eight years to recover from the dot-com meltdown. Before the bust, Sun reaped huge profits because its servers powered the growth of the Web economy. After the bust, lightly used Sun servers were a glut on the market, sharply curtailing sales of new Sun servers. By the time the economy recovered, Sun found that its market was getting squeezed in the low and midrange by the likes of HP and Dell and on the high end by IBM.

      As a result, Sun’s server sales have stagnated, and it has had to repeatedly restructure. Although Sun’s stock had clawed its way back into the $20 range since the dot-com bust, its share price has hovered between $4 and $5 for long stretches during this decade.

      Thus it seemed that a buyout by IBM would be the best possible outcome for Sun-one that would enable Sun shareholders to reap a decent price for their much devalued assets and perhaps provide a way for the Sun brand to survive in the IT market for at least a little while longer.

      Now everything is back to square one, and Sun finds itself in exactly the same position as Yahoo after it rejected Microsoft’s very ardent buyout offers. Sun no longer has an offer on the table, and the future is looking dim.

      Since it’s likely that Sun has burned its IBM bridge behind it, Sun will have to find a new buyout prospect or look to its own devices for long-term survival in a recession-stunned market where hardware prices are under greater pressure than ever.

      Some Sun shareholders may be left wondering whether the stubborn pride of the McNealy board faction has cost Sun its last best chance of reaping the most value for the company’s assets.

      John Pallatto
      John Pallatto has been editor in chief of QuinStreet Inc.'s eWEEK.com since October 2012. He has more than 40 years of experience as a professional journalist working at a daily newspaper and computer technology trade journals. He was an eWEEK managing editor from 2009 to 2012. From 2003 to 2007 he covered Enterprise Application Software for eWEEK. From June 2007 to 2008 he was eWEEK’s West Coast news editor. Pallatto was a member of the staff that launched PC Week in March 1984. From 1992 to 1996 he was PC Week’s West Coast Bureau chief. From 1996 to 1998 he was a senior editor with Ziff-Davis Internet Computing Magazine. From 2000 to 2002 Pallatto was West Coast bureau chief with Internet World Magazine. His professional journalism career started at the Hartford Courant daily newspaper where he worked from 1974 to 1983.

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