Why Sun makes a whole lot of sense for IBM

Opinion – Finally! I have been waiting for some big mergers for at least half a year, given the fact that some companies could pick up some of their rivals for pocket change these days. Still, the news that IBM might acquire Sun came as a surprise this morning and raised especially one question: Why would IBM want Sun? Sun has not much that is especially attractive from an economic point of view and seemed to be struggling with finding a focus since Scott McNealy handed over the controls to Jonathan Schwartz. But look closer and Sun may be one of the big bargains currently on the market – a bargain that could solve a lot of problems for IBM.

A few months ago, when tech stocks began to hit scary levels, we had an interesting discussion here at TG Daily: Which companies would we buy if we were Google or any other company with a little cash on the side. We closely watched 23 tech stocks ranging from companies such as Nortel, which was down 96% from its 52-week high to the best-performing Oracle, which was down only 32%. I am pretty sure a lot of people and companies had the same thoughts.

There were some good deals out there and Sun was one of them. Down about 85% to a market cap of about $2.4 billion back in November 2008. Now we hear that IBM may be purchasing Sun with an initial offer of about $6.5 billion, which is not only a decent offer over November but not really bad when compared to yesterday either – about a 75% premium over its Tuesday closing price. Today, Sun’s stock jumped by this margin and gained almost 80% in value. But compared to two years ago, $6.5 billion is still a bargain. In March of 2007, Sun’s market cap was about $13 billion and IBM may not have been able to purchase the company for much less than $20 billion. And I should not even talk about the inflated prices from the dotcom boom in late 2000, when Sun hit an all-time high market cap of more than $180 billion.

So, even at $6.5 billion, Sun could be a huge bargain, if it has products that could fit to IBM’s portfolio and strategy. Does it have such products?

Let’s cut to the chase right away. Sun may be one of the more innovative hardware vendors out there, but it is not its strength. It was one of the companies jumping on AMD’s Opteron processors and made substantial advances in the server market, but selling was never Sun’s strength and it was clear that it could never reach Dell or HP in this discipline. Its Sparc-based products remained a solid business for some time, but there was no growth left. More recently, Sun tried to improve its margins by adding more services to its hardware, but as far as IBM is concerned, it is clear that IBM may throw the whole hardware division out or integrate some of it in its own hardware department rather than investing any time in keeping it.
Even if the addition of Sun may indicate that it is a strategic move for IBM to catch up with HP in hardware and services – and to defend itself against Dell or even Cisco down the road – IBM’s interest in Sun is not about hardware and it is not about sales; it is about software technology and a following IBM could not establish itself in a short period of time – and for less than $6.5 billion.
In software, Sun has several interesting jewels – some of which are redundant with what IBM is offering and some of which may be an interesting addition to IBM and may help the company to move into cloud computing much faster than it could do without Sun.

There are redundancies when we look at the operating systems (Solaris at Sun, AIX at IBM), databases (MySQL at Sun, DB2 at IBM) and office software (Star Office at Sun and Symphony at IBM, both of which promote the open ODF file format), for example. But Sun has a few things IBM has not – for example the Java development platform and the Glassfish web application platform. Plus, Sun says it has about 1 million loyal members in its software development community and about 9000 third party companies developing software based on Sun technologies.  

Sun recently described itself as a cloud computing company and it is expected to announce much more about its cloud computing strategy and technologies soon. Given IBM’s size, we haven’t heard much about what Big Blue is doing and some of its customers may also be wondering what IBM’s plans are to help them with cloud ideas. A purchase of Sun would be able to plug a gaping hole in IBM’s portfolio and may even give the company some advantage over HP. In that view, a $6.5 billion investment could be a true bargain. And we should not forget that IBM may need a strong Sun as well as its technologies as a counterweight to Microsoft.  

Wolfgang Gruener is the founder of TG Daily. The opinions expressed in this commentary are solely those of the author.