Sun Sets. IBM the Buyer?

IBM has opened acquisition talks with Sun Microsystems, raising the prospect of a massive consolidation of the software, server and storage markets.

According to the Wall Street Journal IBM has mooted a price of $6.5bn. Sun is currently capitalised at $3.7bn ($4.97/share), but its share price has persistently fallen since the heady days of the dot com boom and has under-performed that of its computer systems competitors over the last few years, making it a much less expensive purchase now that it would have been three or four years ago. Legions of long-term Sun investors who have seen the value of their Sun holdings decline drastically will breathe a huge sigh of relief as they see the potential to make some money at least.

Any deal would likely bring very close scrutiny from regulatory authorities, given both firm’s roles in the server, storage and systems software markets.

With that will signal the end of a nearly 28 year Sun history. Will it pass regulatory muster? In a different time it would not. Today? It might. Sun would probably have to try and find buyers for some pieces to get the past the regulators. Probably the same pieces that IBM would not want anyway.

What’s in it for IBM? Market share. At Sun’s current stock price it is cheaper to buy their market base than it is to develop and compete against them. With the acquisition IBM could pull some tricks –

• Get the Solaris OS to work on Z class MF either natively or as a guest OS.
• Take the Intel class OS’s Open Source. Then unleash them against HP and Dell.
• Completing the first two bullets, either phase out or sell off the manufacturing arm to a OED in Taiwan or Singapore.
• Merge or close down software efforts where there is overlap.
• Fire a bunch of VP’s.
• Eliminate Sun marketing.

For Sun’s customers? Well confusion of course. But it will probably not be that bad in the short term. IBM will either directly or through outsourcers make sure they meet contractual warranty obligations. Systems developed today are much less dependent on the hardware layer than they were just 10 years ago. That being said there will probably be a minor rush to either acquire as backups or displace older Sun devices. Any good size IT installation that has used Sun in the past probably have a bevy of old Sun Sparc stations sitting in closests doing a couple of one trick pony services that nobody felt worth porting. A mini version of the y2K thing.

Long term there is probably no effects in the market. Sun was being squeezed at the top of their range by the Z class devices as they improved their price points. At the bottom end the Intel multicore processors were doing the same thing to Sun on the low end. Sun’s share of the midrange was shrinking. (As was HP’s and IBM’s by the way.) Given the current trajectories, Intel will own all the midrange in probably 10 years.

Which poses the question — does IBM’s buy hasten the process and force HP and IBM to rethink their midrange offerings? For if they do a write down on Sun’s manufacturing because they know Intel’s dominance is the future why not do it once? That is, also do a write off of the old AS/400 and the newer Power series line using non-Intel chips. Two write downs in one. The advantage of course is that the market will not react negatively to a write down of Sun assets as it will be expected. So doing so with the other assets will be favorable. It provides the boardroom cover.

Linky.