IBM Pulls its Offer for Sun Microsystems

IBM’s (News - Alert) $7 billion offer for Sun Microsystems is reportedly off the table – at least for now.

According to published reports, Sun’s board rejected IBM’s offer on Sunday, after several weeks of exclusive negotiations. The deal reportedly fell apart after IBM reduced its offer to $9.40 a share from the $9.55 a share it was offering as of late last week, plus the two companies were unable to agree to certain conditions.

Sun’s shares fell precipitously on the news on Monday.

Sun reportedly didn’t reject the offer outright, but rather wanted certain conditions that IBM’s negotiating team declined to agree to. According to an article in the New York Times, IBM in particular had a problem with the “change of control” contracts associated with Sun’s high level execs and senior managers. Apparently IBM’s negotiating team felt these execs were too high paid and that the high salaries were spread too liberally across the company’s upper management.

Although it’s possible the two companies will return to the negotiating table, the collapse of the deal raises concerns for investors about the future of Sun Microsystems (News - Alert). The company, which makes enterprise-grade servers, computer workstations and business software, has witnessed declining sales in the past year due to the recession and has reportedly been in talks with potential buyers for the past several months.

The deal between the two companies was exclusive, meaning that no other entities could enter into the talks. However, now that IBM has withdrawn its offer, other companies are free to make bids for Sun Microsystems.

Some analysts think Sun’s rejection of IBM’s offer makes it unlikely that other potential buyers will step up to the negotiating table. It has been speculated that HP or Cisco (News - Alert) – both IBM competitors – might make individual offers for Sun.

But now that Sun has rejected IBM’s offer of $9.40 a share -- well below the actual value of its stock -- it seems less likely that either HP or Cisco will come back with a higher offer.

If Sun is unable to find a suitor, it will have no choice but to go solo and stick with its current business model – a model which has been called into question by some analysts because it is increasingly focused on open source. Thus far, the company has had little success using the free software as a means to win service contracts or boost hardware sales.

Had it acquired Sun, IBM would have become a dominant supplier of enterprise-grade, Unix-based servers. It also would have gained the rights to a number of popular business software franchises, including the Java technology used on many Websites.

What’s more the deal would have bolstered IBM’s hardware portfolio and enabled it to go up against HP. Plus it would have gained a portfolio of business software solutions that would have enabled it to better-compete against Oracle (News - Alert).

IBM reportedly had a team of more than 100 lawyers researching every aspect of the deal, from antitrust concerns to Sun’s contracts with employees and IBM competitors.

With Sun’s shares dropping today – plus the resultant investor pressure to make a deal come to fruition – it’s still possible the two companies will return to the negotiating table.

Sun is scheduled to report its third-quarter results later this month.