Sun Micro surges on report of takeover talks with IBM

Sun Microsystems Inc surged as much as 66 per cent in early trading after the Wall Street Journal said International Business Machines Corp may buy the computer-server maker for at least $6.5 billion.

The offer would value Sun at close to double the $4.97 closing price yesterday, the newspaper said, citing people familiar with the plan. The companies are still in talks and may not reach a deal, the Journal said. Officials at Sun and IBM declined to comment.

The acquisition of Sun, which would be the biggest in IBM’s history, would help the company widen its lead over Hewlett-Packard Co in the $53.1 billion market for servers, which run networks and websites. IBM Chief Executive Officer Sam Palmisano said last week that he plans to “go on offence” amid the economic slump, acquiring and investing in research.

“It’s the war of the data centres, and an acquisition would leave only two or three players left,” said Robert Jakobsen, a Silkeborg, Denmark-based analyst at Jyske Bank A/S. “The stock market has not been too good to Sun in the last 12 months,” allowing IBM to buy it at a discount, he said.
 

THE INDIA STORY
Company	Employee	Server share	Storage
IBM	70,000 plus	No. 2	Shuffles between No. 2 and No. 3
Sun Microsystems	1,200 approx	No. 3	Shuffles between No. 3 and No. 4
Source: Analyst data; Q3, 2008 rankings (based on unit sales)

Sun rose as much as $3.26 to $8.23 in trading before exchanges opened. The shares, which trade on the Nasdaq Stock Market, had dropped 69 per cent in the past year before today. IBM closed at $92.91 yesterday on the New York Stock Exchange.

Analysts, on average, project Santa Clara, California-based Sun will post its third consecutive quarterly loss as the recession crushes corporate demand. Chief Executive Officer Jonathan Schwartz is trying to weather that by slashing as many as 6,000 jobs and offering lower-priced products.

Both companies are seeking growth in areas such as cloud computing, where providers rent out computing and storage space so customers don’t have to buy their own equipment. Sun plans to introduce its own Sun Cloud Compute service this year over the Internet. Last month, Armonk, New York-based IBM created a separate division to focus on the business.

Paying at least $6.5 billion for Sun, or about $8.75 a share, would be the biggest acquisition in IBM’s history of more than 100 years. The company bought Cognos Inc for $4.9 billion last year to compete with Oracle Corp and SAP AG in providing software that tracks corporate performance.

Fewer Deals
Arlene Wainstein, a spokeswoman for IBM in Paris, said it’s company policy not to comment on reports. Shabita Wu, a spokeswoman at Sun in Taipei, declined to comment on the report.

Companies in the technology industry have announced $3.6 billion of acquisitions so far this year, less than a fifth of the value of takeovers they announced in the same period a year earlier, according to data compiled by Bloomberg.

Drugmakers have led merger activity this year, with Pfizer Inc agreeing to buy Wyeth for $64.2 billion and Merck & Co acquiring Schering-Plough Corp for $41.1 billion. There have been 39 software deals this month totalling $75 million, according to Bloomberg data.

The acquisition would be the biggest in the industry since Hewlett-Packard agreed to buy Electronic Data Systems Corp for $13 billion in May last year, Bloomberg data show.

Buying Sun Microsystems would boost IBM’s share of global server sales by 9.6 percentage points to 43 per cent, widening the lead over Hewlett-Packard’s 30 percent, according to fourth- quarter estimates at Credit Suisse Group AG today.

Contacting Suitors: Dell Inc ranked third in the industry with a share of 10.7 per cent, followed by Sun and Fujitsu Ltd, according to the report.

Global sales of computer servers will probably fall 17 per cent to $44.2 billion this year as the global recession drives down demand and prices, according to the Credit Suisse report.

“The bigger you are the better things are,” said Richard Nguyen, an analyst at Societe Generale Securities in Paris. Nguyen has a ”sell” rating on IBM stock.

In January 2007, an investment fund owned by Kohlberg Kravis Roberts & Co bought $700 million of Sun’s convertible notes. James H Greene Jr, a KKR general partner, has been on Sun’s board since last year.

Sun founder and former CEO Scott McNealy is chairman of the company, and its single biggest investor, with about 14.1 million shares as of August last year.

In recent months, Sun Microsystems has contacted a number of technology companies with the aim of being acquired, people familiar with the matter said, according to the Wall Street Journal.