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

Updated: Late last night, The New York Times reported that IBM’s rumored $7 billion acquisition of Sun Microsystems 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 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 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.

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