Sun reportedly rejected an offer of about $9.4 a share as too low.
Sun Microsystems Inc slumped as much as 27 per cent in early trading after reports that takeover negotiations with International Business Machines Corp fell apart.
Sun’s board, led by co-founder Scott McNealy, told Armonk, New York-based IBM on April 4 it was breaking off exclusive talks, according to a person familiar with the situation. Sun, the developer of the Java programming language, rejected an offer of about $9.40 a share as too low, said the person, who declined to be identified because the talks are private.
The collapse of what would have been the biggest technology deal of the year increases pressure on McNealy to find another suitor as the server maker heads for its biggest annual loss in six years because customers are cutting orders. The offer, equal to about $7 billion, was 11 per cent higher than Sun’s stock price on April 3, even after expectations of an agreement drove up the shares 71 per cent in the past 2 1/2 weeks.
Sun should “articulate a go-it-alone strategy,” said Peter Falvey, co-founder of Boston-based investment bank Revolution Partners. “What they need to do is figure out: Do they aggressively go after other potential acquirers?”
Sun dropped as much as $2.26 to $6.23 in early trading after closing at $8.49 April 3 on the Nasdaq Stock Market. IBM closed at $102.22 on the New York Stock Exchange last week.
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Edward Barbini, a representative for IBM, the world’s largest computer-services provider, declined to comment. Sun spokesman Shawn Dainas didn’t return an e-mail seeking comment.
Sun balks
Sun balked because there were no guarantees in the merger contract that IBM would close the deal if the companies faced barriers or delays such as an antitrust review, the person said. Buying Sun would have been IBM’s biggest purchase ever.
It’s unclear whether the talks have come to a dead end or whether negotiations will resume, the person said. IBM, led by Chief Executive Officer Samuel Palmisano, planned to announce the acquisition of Santa Clara, California-based Sun on Monday, another person familiar with the matter said this month.
Sun jumped 79 per cent on March 18, the day the talks were first reported. Since then, the shares have dropped as much as 26 per cent on concern that the acquisition may fall apart.
“I’m a little surprised that the board rejected it out of hand,” said Falvey at Revolution Partners. “Maybe there’s a little bit of brinksmanship going on.”
The collapse of the discussions was reported yesterday by the Wall Street Journal.
Server consolidation
Sun is the fourth-largest maker of servers, the computers used to run websites and corporate networks. IBM is the top vendor, so the combination would have paved the way for IBM to increase its lead over second ranked Hewlett-Packard Co to almost half the $53 billion global market for the machines.
In the fourth quarter, server sales industrywide fell 14 per cent, the most since the aftermath of the dot-com bust, as customers held off buying both costly and inexpensive systems, according to research firm IDC.
Sun depends on servers for almost half its sales and counts General Electric Co. and General Motors Corp among its customers. The company is poised to post a $1.24 billion loss for the year ending June 2009, according to the average of six analyst estimates compiled by Bloomberg.
Antitrust scrutiny
If the two sides agree to a deal, they may draw antitrust scrutiny over the market for the most-powerful servers powered by the Unix operating system. IBM leads in sales of those machines, with a 36 percent share, while second ranking Sun holds 28 per cent, according to researcher Gartner Inc.
The deal also would help IBM bolster its newly created unit for cloud computing, where providers rent out computing and storage so customers don’t have to buy their own equipment. Last month, Sun announced plans to offer the Sun Cloud Compute Service and the Sun Cloud Storage Service by this summer, entering a market projected to exceed $40 billion by 2012.
Analysts project Sun will post its third straight quarterly loss as the recession curbs corporate demand. Jonathan Schwartz, who took over as CEO from McNealy in 2006, is slashing as many as 6,000 jobs and offering lower-priced products.
The collapse of talks with IBM may force the company to pursue a deal elsewhere, with Hewlett-Packard and Cisco Systems Inc., which entered the server market last month, among possible suitors. Intel Corp. Chief Executive Officer Paul Otellini said in March that Sun had been approaching potential buyers over the past few months.
IBM has spent $9.3 billion on at least 35 software companies since Palmisano took over in 2002. That spree has helped boost software sales 37 percent since 2004, and the company trails only Microsoft Corp. and Oracle Corp. in software products.
“The price was rather high,” said Yoshiharu Izumi, a Tokyo-based analyst at JPMorgan Chase & Co. “Although this deal wasn’t a life or death situation for IBM, Sun’s assets are attractive enough to draw other suitors.”