IBM in Final Stages of Negotiations with Sun Microsystems

International Business Machines and Sun Microsystems have been making waves in recent weeks. As TMCnet has been keeping up with the story, IBM (News - Alert) and Sun have been making some changes with reported layoffs and talks about Sun Microsystems (News - Alert) merging with IBM. Today, the Wall Street Journal has reported that both companies are in the final stages of negotiations to combine the two corporate computer giants.

 

IBM would pay $9.55 a share for Sun, about $1-a-share lower than Sun previously expected, according to people familiar with the talks. This price has valuing the entire company at about $7 billion, lowering the amount IBM would have to pay by roughly $750 million.

 

In return, Sun is demanding assurances that IBM will push to complete a deal even if it faces vigorous regulatory objections to the plan, these people said. An agreement could be announced soon, these people said. However, it is still possible the talks could unravel.

 

According to the Wall Street Journal, IBM and Sun have a dominant 65 percent share in the market for high-end Unix servers, and between them would have virtually the entire market for tape-based storage devices. Cisco (News - Alert) Systems Inc. recently announced plans to enter the server market, and there is widespread availability of free Linux software to run servers.

 

Some analysts believe a deal would make sense for both IBM and Sun. Sun's proprietary hardware business has all seized to be in the face of competition from companies such as Intel, and it's struggling to keep pace with larger players in the software business, such as Oracle, Microsoft (News - Alert), and IBM itself.

 

Sun shares rose 15 cents to $8.15 Thursday on the NASDAQ Stock Market, giving the company a market value of about $6.1 billion.

 

Investors fear that if IBM backs off, Sun's stock would drop sharply -- as Yahoo found out last year when it rejected an offer by Microsoft in which TMCnet had also followed that story closely.

 

Howard Berkower, a merger-and-acquisitions specialist at the law firm McCarter & English LLP, said walk-away fees in transactions have risen sharply lately. However, any fee would be unlikely to make up for the potential drop in Sun's market value should the deal not close. "It doesn't beat forcing a bidder to close the deal," he said.

 

There are few other potential bidders besides IBM. Other large information-technology companies looked at Sun and decided to pass, according to people familiar with the situation.

 

Edward Henneberry, a Washington, D.C., antitrust attorney and former antitrust regulator in Ireland and Brussels, said Sun may also seek an agreement that IBM will go to court if challenged rather than canceling the deal. Or Sun may demand the buyer go through with the deal no matter what remedies or divestitures the regulators order.

 

"If this merger is announced, it will require careful, extensive review by antitrust authorities because of the wide range of products both companies now produce," said Ed Black, CEO of the Computer & Communications Industry Association, in a statement last month.

 

CCIA is a D.C.-based lobby group whose member includes Microsoft Google and Advanced Micro Devices (News - Alert) as well as mainframe maker T3 Technologies.

 

IBM is well positioned to take advantage of low market valuations for Sun and other industry players, says InformationWeek.com, the company's profits and revenue have held up better than most of its competitors during the recession, largely due to long-term services engagements that generate a steady stream of predictable revenues, and a number of cost-cutting moves.