Sun Split On IBM Deal?

Fascinating article in the Wall Street Journal saying that the IBM acquisition of Sun has been pulled. Seems the board is divided over whether or not to accept with a faction led by Scott McNealy against vs. a group led by Schwartz for the deal. Price isn't supposed to be the biggest issue, despite IBM apparently lowering its bid following extensive due-diligence.

Regardless of how this plays out - and it's likely the saga hasn't yet reaches the end of the telling as yet - bet Sun's stock price gets clobbered tomorrow morning, especially as the WSJ also says there are no other suitors waiting in the wings ....

Sun Setting Over Armonk?

Rumours intensified today that IBM will make public a bid for Sun Microsystems before the week is out. Even a cursory glance at what's being bandied about shows that this is a good move by Big Blue. Sun has around $2.6 B in cash and equivalents, cutting the $6.5 B price, reportedly offered by IBM, to more like $4 B net, a figure just shy of 1Qs worth of Sun's TTM revenues.

Obviously, this would increase IBM's share of the server and data center markets, something that would be particularly valuable just as Cisco announced this week its entry into the fray. However, this also begs the question of whether or not that $6.5 B price will stick if Cisco or HP (Hurd is said to have already passed on the deal when approached by Sun) decide that letting it fall into the clutches of IBM is not in their best interests. There may yet be upside in this offer, putting us back into potential soap-opera land if indeed others start coming back to the table. (We miss talking about Yahoo! and Microsoft so this saga may yet provide a suitable substitute.)

Of all the players, it's hard not to argue that IBM is the best fit. The recent performance of their server division has been extremely strong and IBM has systematically been increasing its competitiveness by bringing newer technology to market faster than the competition has been able to. IBM is also well versed in how to manage long-lived architectural migrations so Sun's customers would be reassured that finally there's a path forwards for them. And along those lines, it's also worth noting that IBM's recent acquisition of Transitive sets them up in an ideal position to be able now to manage such a migration in the optimal way.

That's outside looking in, but what about inside looking out? How might Sun fare if this process were to go through?

1. A ton more layoffs. Sun has never cut back as hard as it should have done, especially given the weak state it's been in since the last bust in 2000. IBM will fix that problem, and then some.

2. Stuff will get sold off. Unclear Sun's foray into storage has delivered much of anything so IBM might just ditch that piece, freeing up capital to apply elsewhere.

3. IBM gets that the world is changing, even in corporate data centers. All the buzz is around cloud computing, but IBM sees broader changes even that that. Platforms like the iPhone, netbooks and others are heralding a world where applications will need to be accessible regardless of where they reside - clouds again - or from whichever platform is being employed by the end user - iPhone and Blackberries, to name but two. No one is better placed to drive this than IBM - Telelogic's embedded strengths anyone? - and Sun's expertise and product line here would fit extremely well into that vision, perhaps even allowing for some retrospective justification of the ridiculous amount they recently paid for MySQL.

4. Engineers good, everyone else bad. Expect huge attrition in the Sun sales force. Either they will leave because of culture clash or they will be pushed out to save costs. Expect to see a lot of Sun's account managers rapidly polishing up their CVs, therefore.

5. And just suppose it doesn't go through, what then? This is a leaf from the Microsoft playbook: even if the bid fails, you have publicly delivered a mortal blow to Sun. What customer will now commit, long term, to their proprietary hardware with this level of uncertainty? It will be very hard to see a future from this point on where Sun remains an independent company. Bye-bye SPARC. It's been real, but it's time you went the way of DEC Alpha.

However this plays out, this is one sunset that isn't going to be paired with a new dawn. No longer the dot in dotcom, Sun is now set to become the period after the word "history."

IBM: The Elephant's Still Dancing

Both the market and Silicon Valley held their collective breaths today, waiting for IBM to announce their 4th quarter and FY08 results.

Thankfully, they were actually surprisingly good, even allowing for some clever positioning by IBM's - doubtless extensive - finance department. Although revenues were down relative to 2007, IBM included an analysis showing the effects of the extreme currency exchange shifts we've seen over the past months as a way of explaining away the lion's share of the decline. (Just check out the current USD Sterling exchange rate. It's now 1GBP = $1.38. Earlier in 2008 it was more like 1 GBP = $2. Good for expenses; bad for repatriated revenues!)

Mitigating the marginal fall in revenues, profitability actually beat Wall Street's consensus expectations. Net income in 4Q08 grew 12% over 4Q07, a result that's impressive for a business of that size operating in the worst quarters worth of economic data we've seen in many a long year. IBM reiterated that they are on course to further strengthen margins through 2009 and into 2010.

This has to be hugely stabilizing, not just for the tech. sector but for industry as a whole here in the USA. Frankly, it's also testament to the quality of the senior management team at IBM that they can react so quickly to circumstances that have other blue-chip companies heading for the bunker and blaming the economic fall-out raining down on them on "circumstances beyond our control".

Too soon to declare that the fabled green shoots of recovery are springing up all around us, but at least it might be an early sign that the future prospects for 2009 aren't as bleak as we may have feared.