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IBM-Sun Merger Talks Off

Disagreement over price and other terms lead to the break, allowing Sun to negotiate with other potential acquirers

Merger talks between IBM (IBM) and Sun Microsystems (JAVA) broke off Apr. 5, ending—for now at least—IBM's bid to buy the hobbled computer maker.

The companies had been talking for more than three months, but a disagreement over price and some of the agreement's terms prompted the break-off, according to people close to the negotiations. Neither IBM nor Sun would comment or even acknowledge that they had been negotiating.

Earlier the companies had been talking about a price in the $10-to-$11 range, valuing Sun at about $7 billion. But IBM pressed for a lower price, and on Apr. 4, Sun insisted on a higher one. Sun also wanted assurances that IBM would remain committed to the deal even if it ran into serious objections from government antitrust authorities, according to the sources.

Early test of Obama Antitrust Stance

The deal would have faced face antitrust scrutiny and been a major early test case for the Obama Administration to signal its posture regarding antitrust policy. The combination would have given IBM monopoly strength, with 65% of the market for server computers that are based on the Unix operating system. However, IBM has nothing close to monopoly power when the entire computer server market is taken into account. A Sun acquisition would increase IBM's share of that market by nearly a third, to 42% of the overall market, but the company would still face fierce competition from the world's two leading computer companies, Hewlett-Packard (HPQ) and Dell (DELL).

Before the deal was announced, Ed Black, president of the Computer & Communications Industry Assn., a computer industry trade group, called for a careful review by antitrust authorities. "A merger would eliminate a key competitor, which affects choice and prices down the line on numerous IT products," Black said.

For IBM's part, it was concerned that some of Sun's partnerships carried with them terms that IBM was uncomfortable with. Details of those terms were not available, but they may have centered on Sun's close relationship with Oracle (ORCL). The database software maker competes fiercely with IBM in the database market.

Losses and Job cuts at troubled Sun

On Saturday, after both sides reached an impasse on price and other considerations, Sun's negotiators terminated their exclusivity agreement, opening the company up to discussing merger with other companies. IBM then broke off the negotiations, the sources said.

The breakup is more meaningful to Sun than IBM. Santa Clara (Calif.)-based Sun is in financial trouble—losing nearly $1.9 billion in its last two quarters as demand plummeted for its high-end servers. The company has fired 2,800 employees so far this year in budget-cutting moves.

IBM, on the other hand, is one of the strongest players in the corporate computing business, showing a profit gain in the fourth quarter in spite of a 6% revenue contraction. The company's stock has soared by 21% so far this year, while the stock price of its main rival, HP, has declined by 6%. Still, the Sun deal would have bolstered IBM's position in the high end of corporate computing and in the nascent market for so-called cloud computing services.

Tech industry sources say Sun began shopping itself late last year. Now that news of its talks with IBM have gone public, Sun finds itself in an even weaker position. "Sun is now sort of damaged goods," says Peter Falvey, a partner at Boston-based Revolution Partners, which invests in Silicon Valley firms. "If IBM got under the covers and didn't like what they saw, then what does that mean for other potential buyers?"

Business Exchange related topics:


Sun Microsystems

Mergers and Acquisitions

Corporate Layoffs

Hamm is a senior writer for BusinessWeek in New York and author of the Globespotting blog.

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