IBM's Sun Deal Flames Out

Easy come, easy go -- will you let me go?
Bismillah, no! We will not let you go!
-- Queen, "Bohemian Rhapsody"

IBM (NYSE: IBM  ) never officially told us that it wants to buy Sun Microsystems (Nasdaq: JAVA  ) , but that didn't stop Sun's stock from soaring by nearly 90% when the rumors emerged. Fellow Fool Tim Beyers told you to take the double and run back then, and I hope you listened. Even so, this would be a good time to get back in, because I believe that the buyout will indeed happen.

Easy come, easy go, you know. The Wall Street Journal, which first featured the acquisition reports that started this crazy dance, now says that the deal is falling apart over pricing problems. Infighting in the Sun ranks didn't help, either. CEO Jonathan Schwartz reportedly wanted to sell, but Chairman Scott McNealy apparently didn't. The stock has taken a 23% swan dive as of this writing.

Still, an IBM-Sun buyout would make sense. Sun is already trying its darndest to look like a mini-IBM. Rather than picking a single strategy and sticking to it, the company wants to provide the hardware, the operating system, the middleware programs, and the programming language you need to run a data center. But Sun lacks the scale of the real Big Blue, and it never had the resources to excel at all of the above.

Mr. Market seems to agree. While Sun's shares are falling hard, they're still some 32% above the pre-rumor prices of March 17. Meanwhile, the S&P 500 benchmark gained 6%, IBM improved by 8%, and Sun rivals such as Hewlett-Packard (NYSE: HPQ  ) and Dell (Nasdaq: DELL  ) moseyed along at 12% and 8%, respectively. So while the overall market has been healthy, visions of acquisitive sugarplums still seem to dance in Sun shareholders' heads.

I think the deal will happen. Microsoft (Nasdaq: MSFT  ) didn't fail to buy Yahoo! (Nasdaq: YHOO  ) last year because of deteriorating markets, an unhealthy buyout climate, or anything of the sort. It was simply a bad idea from the start. Combining Sun and IBM gives the merged entity a strong position in the markets for midrange server systems -- and much of the software they'll run. This deal makes too much sense to fail.

Beelzebub has a deal set aside for Sun.

Oh mama mia, mama mia:

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Fool contributor Anders Bylund holds no position in any of the companies discussed here. You can check out Anders' holdings or a concise bio if you like. Any way the wind blows, The Motley Fool is investors writing for investors.


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  • Report this Comment On April 06, 2009, at 3:26 PM, tgauchat wrote:

    I agree with your confidence "Even so, this would be a good time to get back in, because I believe that the buyout will indeed happen."

    Though there are many examples to the contrary (Yahoo!!!!!!), companies cannot afford to walk away from the type of premiums being discussed here, and the net potential synergies between IBM and Sun have been evident for a very long time now. Sun has been building up their relationship with IBM in preparation for this sale.

  • Report this Comment On April 06, 2009, at 10:53 PM, ben94104 wrote:

    Chairman Scott McNealy is a buffoon. JAVA shareholders have been waiting a long time (since the dot.com bust) for some good news to recover their losses that they have incurred under McNealy's (and now Schwartz's) watch. If this deal fails, McNealy and Schwartz will suffer the same fate as Yang at Yahoo.

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