Now that the news is out on IBM’s proposed $6.5 billion purchase of Sun Microsystems, analysts are in a lather over why Big Blue wants to make the deal.
The Wall Street Journal originally broke the story, reporting that the merger “could help IBM in the finance and telecommunications markets as it tries to expand its role in digitizing key pieces of infrastructure, from electric utilities to water supplies. While some of their technologies and customers overlap, IBM and Sun have been heading in different directions for most of the past decade.”
Less charitable media reports say that IBM is benevolently putting Sun out of its decade-long misery. As The Journal reports, the company has slashed thousands of jobs, and placed too much focus on open-sourced software that didn’t really pan out for Sun. But the company does have a market cap of $4 billion and also has $2.6 billion in reserves that could easily be converted to cash.
Sun’s shares shot up 72% on news of the merger, while IBM’s fell by two points in mid-day Wednesday trading.
For its part, Sun would give IBM it’s long-awaited invitation to the software market, especially server and storage software sales, with Cisco as its new chief competitor.
Says UBS analyst Maynard Um says in a research note: “Our Sun thesis has been that there is a potential restructuring story given relative inefficiencies. We do think IBM would be in a position to take out cost more quickly, however, we expect Sun revs to continue to be pressured in FY09 & FY10 given its reliance on high end servers and limited ability to monetize its software. And while IBM is certainly financially capable of purchasing Sun, we would note that a $6.5 billion acquisition would be large even by IBM’s standards, and would also be a deviation from IBM’s current strategy of tuck-in acquisitions.”
Sun critics have said that the company was too overly reliant on the U.S., where demand is down. IBM, with its sprawling global brand, is in a position to nurse Sun back to health and make IBM a viable software sales option. Says Seeking Alpha in an “instant analysis” piece today, “Here’s why the deal makes some sense: IBM can acquire server and storage share. Sun still has a lot of hardware on the market in key verticals such as finance and telecom. The problem is that Sun is reliant on U.S. sales and that’s not a fun place to be right now. With Cisco entering the server market the profit margins could be squeezed—especially if the server essentially becomes a storage and networking box too. By acquiring Sun, IBM gets more scale so it can endure the margin squeeze. That same argument holds for storage hardware too.”
Seeking Alpha also thinks that it’s Hewlett-Packard, and not Cisco is the true target for IBM. How so? The thinking goes this way: HP acquired EDS and now the chess board demands a response from IBM. Sun is IBM’s move to combat HP’s assault on its turf.
It’s not a done deal yet, although it sure seems like it. One thing’s for sure, Silicon Valley has a new look – hued in blue.