Latest Buzz on Sun, IBM Deal Talks

by Manu Sharma    Mar 20, 2009

Whether it is mere speculation or a fact , the combination of two IT giants — IBM and Sun Microsystems — will surely alter the dynamics of the IT services market.

Of recent times, everybody is racing to offer hardware-software services and own data centres. We have seen that happen with Cisco s Unified Computing Systems, HP bought EDS, now IBM is looking at Sun.

There is no official comment from the two companies, but if the deal goes through it will give IBM a bigger control of the market and make it a fitting rival for HP, Dell and Microsoft.

Together, IBM and Sun would have about 65% of the market for server computers running the Unix operating system and 42% of the total server market, measured by the dollar value of the market.

Like Sun’s Java and Solaris, the operating systems have gained substantial market share over the years. Similarly, Sun could give it some extra hardware market share specifically in servers.

However, reports indicate that Sun has not been doing well ever since the global recession began last September. Reports indicate that IBM may pay at least $6.5 billion in cash for the deal, which would be a 100% premium over Tuesday’s closing price for Sun.

In last year’s fourth quarter, IBM led in the global server market revenue with $4.9 billion in sales, about 36% of the market. HP was No. 2 with $3.9 billion in sales ie, about 29% of the market. Dell, with $1.4 billion in sales, and Sun, with about $1.3 billion, were a distant No. 3 and No. 4.

However, Sun’s Solaris servers have a strong presence in the premium market, which is seen as more profitable. That is why that valuation may be justifiable for IBM.

But Sun’s recent acquisition of StorageTek for $4.1 billion was termed as a hogwash, mainly because it did not go well with Sun and ended up in cold waters.

With customers like HDFC Bank, Punjab National Bank (PNB) and Tata Teleservices, Sun’s strong presence in the financial services and telecom domains has been the envy of its rivals.

But in case of a merger, issues like having a number of common customers and how to merge the two global brands will come up. As a Sun employee, said, Sun employees are concerned about the future of our products if the acquisition happens, since there is a significant overlap between our products and that of IBM s.

Sun’s corporate communications office terms it as a mere speculation and refused to comment on the rumour . So did the IBM communication team, saying they have no reactions from their headquarters and cannot comment on the issue.

Meanwhile, T.R. Madan Mohan, managing partner, Browne and Mohan, said that the WSJ picked up the news from the blog of a Sun employee.

According to him, the deal may not come through, but given the market cap of Sun, which is just about $ 2 billion, and IBM is supposed to have quoted $ 6.5 to $ 6.8 billion that is a very good valuation for a company that has been dithering.

Similarly, Sun’s strengths are in government, BFSI and telecom. In telecom, it has some marque clients such as NTTDocomo, Dialog, Telefunken, Vodafone, etc which run mission-critical applications.

IBM has not been able to move into these accounts globally, unlike the easy entry the company had with Bharti Airtel, Aircel, Vodafone, Idea in India. By acquiring Sun, IBM will get access to these critical markets and benefit from the Java/My SQL communities.

Related Links

Review 2008: The Major Acquisitions Part 2

Big 5 Server Vendors See Revenues Drop