Source: SanJoseMercuryNews With IBM reportedly in talks to buy Sun Microsystems, industry experts say the two tech giants — both of which earned early fortunes by selling expensive hardware — are looking to a future based on a much broader range of computing gear, software and tech services.
"It's about the whole data center," said Chris Foster, a veteran analyst at Technology Business Research, noting that a deal would give IBM control over Sun's cornerstone Java programming language and other valuable software, as well as access to hardware customers and highly profitable contracts for consulting and other services.
Both companies declined to comment Wednesday on reports that IBM is negotiating a possible $6.5 billion purchase of Sun — a deal that would shake up the global tech industry and spell the demise of a venerable but now-struggling Silicon Valley pioneer. After its founding in 1982, Sun built a hugely successful business selling powerful computer workstations and later the servers behind much of the first Internet boom.
News of the talks first surfaced Wednesday in The Wall Street Journal, which cited unnamed sources familiar with the discussions. While those sources said a deal could be struck this week, analysts said it is by no means certain, and even suggested Sun might entertain offers from other suitors.
But if the sale occurs, analysts say it would reverberate through the ranks of other tech giants, including Hewlett-Packard and Cisco Systems, which are also expanding their range of data center products and services. It could open the door to more acquisitions as competitors jockey to fill gaps in their own portfolios.
It also could produce substantially more layoffs in an industry already reeling from the recession, as IBM seeks to mitigate the cost by cutting redundant positions in sales, administration, research and development.
Acquiring Sun would give IBM a boost in the computer server market, where the New York company has long competed with Palo Alto-based HP for the position of market leader. Sun is the world's fourth-largest seller of servers, the industrial-strength computers that are the building blocks of most data centers; it had about 10 percent of the market and $5.5 billion in server revenue last year.
Each company has its own lines of hardware, but there is enough overlap that some analysts questioned the benefit of a deal. Though IBM was originally known for its big mainframes, it has in recent years divested its personal computer business and shifted its focus to software and services — which contributed 80 percent of IBM's $104 billion in revenue last year and helped it post a 12 percent increase in profit for its last quarter, despite the global economic slowdown.
Sun, meanwhile, has posted losses in the past two quarters and struggled for several years because the biggest part of its revenue comes from high-end servers and storage systems that many customers are no longer buying. In acquiring Sun, Credit Suisse analyst Bill Shope wrote in a note to investors, IBM would be "doubling down in one of the most secularly challenged segments in servers. In our view, the acquisition makes little strategic sense."
Reports of the talks drove IBM's stock down 1 percent to close at $91.95 on Wednesday, while Sun's stock soared 79 percent, to $8.89.
Sun has based its current business strategy on open-source software and on developing new technology for cost-conscious customers. In recent months, the company has been at the industry's vanguard in offering new storage and server systems that exploit innovations in software and solid-state memory. It's also been developing new cloud-computing services for software developers and Web-based businesses.
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