Sun's Future In Question As IBM Talks Collapse

Shares of Sun Microsystems were poised for a sharp sell-off Monday after reports that the company's $7 billion merger with IBM is off.

Negotiations collapsed Sunday following IBM's tabling of a price that was lower than its original offer and Sun's insistence that it consider other proposals, according to several published reports, all of which cited unnamed sources. Officials for Sun and IBM haven't commented on the issue since the discussions reportedly began.

The termination of the talks could erase gains in Sun's share price that have occurred since word broke that the company was seriously eyeing a buyout offer from its larger rival. Sun's stock, long battered by the economic slump and the company's loss of share in some key segments, jumped more than 80% in price on March 18 after both The Wall Street Journal and The New York Times ran stories about the proposed deal.

On Sunday, both papers said the negotiations were in disarray. The Journal reported that the talks were "on the brink of collapse," while The Times declared that "the deal's collapse raises questions about Sun's next step."

Indeed, investors were hopeful that a tie-up with IBM could help Sun better monetize its trove of valuable open source products, such as MySQL, and offset competition from Intel-based commodity servers. Now, all bets appear to be off.

What's not clear is whether antitrust concerns played a role in IBM's decision to break off the talks.

The Computer & Communications Industry Association, a tech group largely made up of IBM rivals, has said that a merger between Big Blue and Sun would be harmful to competition in the IT industry and lead to higher prices for software and hardware.

CCIA is a D.C.-based lobby group whose members include Microsoft, Google, and Advanced Micro Devices, as well as mainframe maker T3 Technologies.

It's also possible that IBM's apparent withdrawal from the negotiating table is merely a bargaining ploy that's not uncommon in the tech industry. Microsoft and Yahoo have been engaged for the past year in an elaborate pas de deux -- appearing close to a deal at times and far apart at others.

Some analysts believe an IBM acquisition of Sun still makes sense. Sun's proprietary hardware business has all but dried up in the face of competition from commodity players such as Intel and Dell, and it's struggling to keep pace with larger players in the software business, such as Oracle, Microsoft, and IBM itself.

Yet the company retains key, widely used assets, including the Solaris operating system, the open source MySQL database -- which boasts more than 11 million installations -- and the Java programming language.

IBM is well positioned to take advantage of low market valuations for Sun and other industry players. The company's profits and revenue have held up better than most of its competitors during the recession, largely because of long-term services engagements that generate a steady stream of predictable revenue, and a number of cost-cutting moves that include recent layoff notices to about 9,000 U.S. workers.

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