IBM has ripped up its offer to buy Sun Microsystems. And remarkably, it’s because Sun’s board walked away first.
For Sun’s investors’ sake, I hope this is a flurry of last-minute negotiating before the deal is signed. If the deal really is dead, there won’t be any more easy exits from the long, dismal march Sun has been on for the last nine years. According to reports, Sun’s board has been talking to various suitors for months, but only Big Blue has asked it to dance. I don’t see any others emerging. Once upon a time private equity shops might have been interested in buying some or all of the company, but those days are long gone thanks to the credit crunch. Unless Dell wants to make a huge strategic shift from its R&D-less distribution-based strategy, don’t look for any of Sun’s traditional rivals in the computer server business snapping it up.
Many eyes will no doubt turn to Cisco, which has over $30 billion in cash and might conceivably want Sun’s market share to turbo-charge its weeks-old entry into the server business. But think about it. Cisco CEO John Chambers buys small promising start-ups, and established players that are clear market leaders in their markets — Linksys in wireless routers, Scientific Atlanta in set-top boxes and Web-Ex in collaboration software. Sun is neither small nor a market leader at this point. And while Sun is the most religious tech company when it comes to its devotion to homegrown technologies (Java, Solaris, Sparc), Cisco is tech’s great agnostic: it could care less which technology it sells, so long as it sells a lot of it. Plus, Chambers likes “clean deals,” as one former Cisco exec tells me. If buying Sun means lots of layoffs and divestment of sick or non-stretegic businesses, he’s unlikely to do it.
So that leaves IBM. If the deal falls apart, Sun shares will likely give back the 84% gain racked up after rumors of the merger first emerged on March 17, and fall below the $4.97 price they were at when that day began.
And Sun’s board will be pilloried for not learning the painful lessons from Yahoo’s debacle last year. That Net giant’s stock soared from $19 to $30 a share after Microsoft offered to buy it in early 2008; now, the stock sits at around $13, and founder and former CEO Jerry Yang—a main detractor of the deal—was replaced by boardmember Carol Bartz.
If any board should have known not to follow in Yahoo’s footsteps, it should have been Sun’s. The two companies have too much in common, including a weak negotiating position. While both Sun and Yahoo have proud histories and vaunted product development teams, they’ve been weighed down by failed strategies and indecisiveness that have led to years of declining share, thought leadership and profits. And just as Microsoft was Yahoo’s acquirer of last resort, so it seems there’s no one waiting in the wings for Sun. In fact, Sun probably needs IBM far more than Yahoo needed Microsoft. Yahoo, for all its problems, remains a giant in most of its markets and is profitable. Sun has lost nearly $1.8 billion over the past four quarters, and risks losing more if it doesn’t maintain share as financial services giants consolidate.
And if Sun’s board needs any reminder of the worst-case scenario, they got an excellent one just last week. That’s when Silicon Graphics Corp., once a proud server rival with revenues of over a billion dollars a year, was sold for the minute amount of $25 million. Sun is far, far healthier than SGI was. But if IBM doesn’t buy it now, my hunch—and no doubt, Wall Street’s hunch—will be that Big Blue will have plenty of opportunities to buy it for less in the months and years ahead.
UPDATE: Now the Wall Street Journal is reporting that Sun co-founder and chairman Scott G. McNealy is leading the faction that’s opposed to the deal. If that’s true, he can expect to come in for withering criticism—not only for being Sun’s Jerry Yang, but also for having stayed on as chairman even after handing the reins to current CEO Jonathan Schwartz a few years back. At the time, many critics felt the strong-willed McNealy should have stepped aside to let his protege run the company as he saw fit.
Plus, McNealy is good friends with Yahoo’s Bartz, who worked for years at Sun. She now has an insider’s view of Yahoo’s disastrous handling of the Microsoft bid (NOTE: I originally suggested Bartz had a “front-row seat” at this debacle, but readers corrected me regarding the fact that she was not a Yahoo director before becoming CEO). If anyone could have advised him on his reported decision to oppose IBM’s bid, it would have been her.