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What's Next, Now That The Sun-IBM Merger Is Off

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Updated: Late last night, The New York Times reported that IBM’s (s ibm) rumored $7 billion acquisition of Sun Microsystems (s JAVA) is off. The doubts about the deal were first reported by The Wall Street Journal. The Journal said that Sun’s board was divided on the wisdom of this deal.

A faction led by CEO Jonathan Schwartz wants to sell the company, while a rival band led by former CEO and Co-founder Scott McNealy doesn’t want to sell. IBM is offering between $9.10 and $9.40 a share, according to the WSJ report. The Times report said that IBM had initially offered $9.55 a share, but later shaved off the offer. Why?

I.B.M. scrutinized the “change of control” contracts with Sun executives, senior engineers and managers. I.B.M. felt that the payments to senior employees were higher and extended more broadly across the company than it had anticipated. I.B.M. pointed to the change of control contracts as one reason it was reducing its offer price.

For some Sun board members, a sticking point was that IBM could totally walk away from the deal because it has too much optionality, the Journal said.

Regardless, this is yet another sad wrinkle on the face of what was once Silicon Valley’s brightest innovator. As expected, naysayers and Wall Street analysts are out in full force saying this is the worst kind of news for Sun.

Having covered Sun for a long time as a reporter, I agree that Sun has its problems. But are the problems so deep that it should just be handed over to a rival? I don’t think so. And while Sun has fallen on tough times, it continues to be a bastion of engineering excellence.

Stacey believes that the two companies, if combined, could have become serious players in cloud computing. In March this year, Sun announced plans to offer its own cloud services, and that is a good place for Sun to start. In my view, IBM was getting quite a bargain with Sun, though I think a company like Cisco Systems (s CSCO) would be a better buyer for Sun, because it can shake up Sun’s academic culture.

Another idea came to me after reading Software AG Deputy CTO Mike Miko Matsumara’s blog, who thinks that with this deal collapsing, we might see the return of Sun  Co-founder, Scott McNealy. Whether that happens or not, the company should also pursue an option of going private.

The four Sun co-founders — Scott McNealy, Bill Joy, Vinod Khosla and Andy Bechtolsheim — swing enough clout in the Valley to help put together a rescue package. Given how easily Palm (s PALM) has been able to raise additional funding, I don’t think Sun will have trouble raising the capital. Bad as it is — down 10.7 percent from fiscal 2008 — Sun will post revenues of just over $12 billion. And it still has a few billion dollars in cash.

23 Responses to “What's Next, Now That The Sun-IBM Merger Is Off”

  1. java_developer

    They need to go private. Amen to that. Get the coke-snorters who brought you the crash of ’28, the Savings and Loan crisis, the Long Term Capital Management multi-billion-dollar bailout fiasco, and finally our current economic collapse OFF THEIR BACKS so they can do what companies do- create value for the marketplace.

    Who the f* cares what Wall Street thinks (an oxymoron) about Sun Microsystems? Wall Street is piled up to the gills with first rate morons who aren’t fit to hold a candle to anyone at Sun, much less determine their “value” and decide their fate.

    But that’s what you get when you go public. Filth and other entities like Southern Asset Management determining whether you live or die. That’s a joke. Go private, yesterday. De-list so you can get things turned around. The market changed, is that somehow Sun’s fault? The bubble collapsed- was that bubble somehow Sun’s doing? This is not a story about a technology company that can’t make products people want. This is a story about a bunch of amphetamine-gulping, Ayn Rand reading coke-heads who have turned Sun into their presumptive vehicle to get their next money-high from.

    Dump them, then go back to work.

  2. mistah

    Is this another founder CEO coming back scenario just like Jobs returning to Apple (circa mid-1990’s) and shift things around? I am hopeful but with a little doubt. I think it would be better if Apple would buy Sun, since OS X is unix by heart the solaris technology could add more blades to there OS, as they more to the 64bit computing, beside slicing a pie of the server market would be another growth area for Apple, beside laptops, iphones and ipod. Besides ideally both company develops their own hardware and software together. Why not buy something that think differently like they do?

  3. Sun was started in the 70’s and is still doing business with a 25 years old OS.. I have used ZFS and it’s the neatest thing since sliced bread. but when a OS cannot open a flash presentation , is so difficult that they need 20 commands to start a process ,hence the TEAMS OS unix admins, the general public will not enbrace..could you imagion Jim in accounting tring to use the command line to run his accounting package?

    • ripratm

      I don’t believe sun is exactly targeting Jim in accounting, or even the
      “general public” as their target audience for Solaris. I have a feeling they
      are targeting the sys admins (for whom they are also selling servers, arrays,
      software, etc) whom are trained to use the 25 year old OS thus do not require
      20 commands to start a single process. In my personal experience that i’ve
      never had to open a flash presentation on one of my servers (which is the target platform btw)
      through an ssh tunnels (I don’t know to many other sys admins have either).

      Instead of trying to make the OS flashy, with the use of souped up GUI’s, Flash, mp3
      players, dvd players etc, SUN has been spending the past 30 years getting
      solaris to scale to an obscene amount of processors, not melt when it reaches
      a load of more that 5.

      I think they are their priorities for an enterprise OS, which is more than what i can say about other companies.

  4. Karthik

    I find it hard to buy the argument that Sun should be given another chance only because it was a storied company in the past. A company’s valuation is driven by its future potential, and it doesn’t look like Sun has much of a future under its current management. Hence, the anemic market valuation, and the lack of interested buyers, etc.

    Even if it were to be taken private (under a different management team), one would have to sell off non-core/under-performing assets and focus on its core strength (whatever that is). That option would still entail laying off a significant number of employees, increasing operational efficiency, etc. Frankly, it would be similar to the IBM takeover case except that there might be some differences in what gets hived off. While I agree Sun might have options other than an IBM takeover, I think Sun would have to evolve into a completely different (and smaller) company with all the other options.

  5. Where is the value in Sun? Every other story talks about the cloud. The largest cloud deployment on the planet is Amazons and it runs on Linux so IBM doesn’t need Sun for that. Besides cloud computing is all about cost and Sun can’t compete there. Btrfs is progressing nicely so ZFS is only important to Solaris.

    MySQL has forked several times and almost no one considers MySQL the official one any more. Open Office has forked and most people use the one at Novel as the official tree now. Sparc will be killed off or sold to Fujistu no matter what happens. Solaris has been dyeing for years and no one is going to risk rolling out new deployments now unless they absolutely have no other choice.

    With so much tech already being virtualized Java has less and less meaning. After all why do you need a virtual machine if you are already running in a virtual machine? There is still some value in Java for performing shake downs but that is about it.

    None of it adds up to 8 billion even after you take the cash, property and other fairly liquid assets into account.

  6. Now… Microsoft should buy Sun out from under IBM’s nose. As I argue here, that would serve the purpose of poking IBM in the eye while potentially giving Microsoft access to some technology and markets (like govt and education) where having an open source alternative would be an open-sesame.

  7. Hi Om!

    Thanks for the reference… “Miko” rather than “Mike” Matsumura…

    The four sun cofounders are indeed amazing and awesome people. Andy Bechtolsheim is again in a startup on Cloud computing, Bill Joy is investing at Kliener Perkins, Vinod is running Khosla ventures. Lots of firepower but perhaps hard to concentrate on behalf of Sun. The other guy who might be able to pick up the phone would be ex CTO Eric Schmidt. Even Yahoo CEO Carol Bartz had a tour of duty at Sun.

    Despite my disappointment with where sun is today (and my snarky comments), I really hope for the best for Sun. I really loved working there and the people at Sun were and are awesome.

    My 2 cents,

  8. I don’t agree with your assessment. If Sun had any traces of wherewithal which made it a name to reckon with in Silicon Valley, it should not have gone ahead with acquisition talks with IBM. Rather it should work on its inherent strengths and look forward to rebuilding itself. With four core founders of Sun still around, I don’t think funding should be a problem.

  9. Mike from Vashon

    The best way to handle a company that has been an innovative leader for some time is to sell it to a much larger company? There are other ideas out there.

    I think they instead have to sit down and have the engineers work things out with marketing. Sun has a long history of creating products that use standards or that are standards, which is why those products plug in and have staying power. It isn’t that hard.

  10. Aaron deMello

    Agreed. The deal is too sweet for Sun and I think Cisco would be a far better fit and there would be less anti-trust issues. I think Chambers could clean up shop, retain Sun’s amazing engineering culture and merge it with Cisco’s execution-excellence operational expertise.