IBM withdraws $7 billion offer for Sun Microsystems

Chicago (IL) – Negotiations between IBM and Sun Microsystems apparently have come to a screeching halt causing Sun’s stock to drop by more than 20%.  According to a report by the Wall Street Journal, Sun co-founder of Sun’s board, Scott McNealy, told IBM that the company wanted to end the discussion about a possible acquisition.

Given the current financial situation of Sun, the company may face some angry investors down the road as an acquisition has been generally viewed as a favorable business decision for Sun. The company is looking at what could potentially be its biggest annual loss in six years with a likely loss of $1.24 billion for the fiscal year, which ends in June 2009, according to Bloomberg estimates. Since 2006, Sun has been reducing its workforce, cutting an estimated 6000 jobs.

When the talks between Sun and IBM were first reported on March 18, Sun’s stock rose 79%. Since then, the company’s stock has declined by about 26%.

Had IBM purchased the company, it would have been Big Blue’s largest purchase ever. Since 2002, IBM has spent $9.3 billion on the purchase of at least 35 software companies, thus boosting the company’s software sales 37% since 2004, putting the company right behind Microsoft and Oracle in the software industry.

Sun largely depends on server sales, which make up half of its business. However, it was widely believed that IBM was not really interested in Sun’s servers but more in software like Java,  MySQL as well as the Glassfish web application platform – which conceivably can create a compelling cloud computing environment.

Sun, on the other side, may not be willing to give up its servers, which compete with IBM in several market segments. Sun is the fourth-largest manufacturer of servers, while IBM is currently the top server vendor.

IBM originally offered Sun $7 billion, which equated to $9.40 per share. Industry sources suggested that Sun felt the offer was just too low. However, the offer was 11% above the company’s April 3 stock price, and that includes the recent increase in share price in the past two and a half weeks as there had been speculation of the two companies reaching an agreement.

Sun’s hesitation to continue in exclusive talks with IBM stems from a lack of guarantee. In the event that barriers arose, for example an antitrust review, there was no guarantee that the deal would close, leaving Sun out in the cold.

If the two companies are capable of coming to a deal, they are subject to antitrust scrutiny as they will dominate the market for Unix based servers. According to Gartner, Inc, IBM and Sun currently share the majority of the market, with IBM holding a 36 percent share, and Sun follows closely behind with a 28 percent share.

At this point in time it is not clear whether or not the deal discussions are completely dead, or if they will continue under a non-exclusive agreement. It was speculated by some that IBM’s chief executive officer Samuel Palmisano was planning to announce the acquisition of Sun today however, others said the announcement would come later in the month.

The deal between IBM and Sun could have potentially been one of the biggest technology deals this year, thus increasing pressure on the company to find another buyer. Sun has been in the market approaching potential buyers for the past few months, according to Paul Otellini chief executive officer of Intel.

If Sun is forced to begin the hunt for another buyer potential suitors include Hewlett-Packard, and Cisco Systems who just made their way into the server market last month.  

Representatives from both Sun and IBM declined comment.