Based on what you wrote, it sounds like the risk/reward at $3.00 favors the upside in light of a possible Sun takeover.

Not so fast. If Sun Microsystems's (NASDAQ:SUNW) business were in good shape, that might well be.

How about an example? Before eBay (NASDAQ:EBAY) acquired PayPal last year, PayPal handled three-quarters -- and growing -- of all payments made on eBay's auction site. And with accelerating growth in its non-auction business, PayPal exhibited stellar margins and returns to scale.

And to top it off, PayPal was reasonably priced: During much of the spring before the acquisition agreement, the stock traded at a 40% to 50% discount to eBay on a forward P/E basis, while growing at a faster rate.

But Sun Microsystems right now looks nothing like PayPal.

It's apparent that beyond poor economic conditions, Sun is operating from a position of increasing competitive weakness. Hewlett-Packard (NYSE:HPQ), with last Friday's $25,000 offer to help Sun customers migrate to Linux-based HP hardware, is signaling that it doesn't believe Sun can compete profitably at the high end while dabbling elsewhere.

The message: Act decisively or sell out.

Hewlett-Packard is losing money in its high-end enterprise systems business. However, HP has significant competitive advantages: other profitable businesses and a bigger bankroll. Hypothetically, all it has to do is lean until Sun keels over, and that's exactly what it is doing.

The $25,000 in free services won't make HP's business profitable now. But it will do one of two things: (1) force Sun to focus on its advantages profitably, or (2) simply help accelerate what appears to be an ongoing customer defection from Sun's proprietary goods.

Think of it as a long-term investment.

As for Sun, to buy it today as an acquisition play, you'd have to believe one of two things:

  1. SUNW at $3.34 per share, or $11 billion, is a deep-value.
  2. Somebody other than HP would be willing to pay more than $11 billion.

Three weeks ago, Tom Jacobs gave the short case why SUNW wasn't a cheap turnaround play at $3.86. But today, the company's competitive weakness as a standalone business is more fully exposed. It is having difficulty on the price-weak high end, and it is playing with fire trying to compete with low-cost leader Dell (NASDAQ:DELL) in the lower ranges.

At $3.34, the acquisition case now rests on someone in the large-scale enterprise business other than HP -- IBM (NYSE:IBM) -- being willing to pay more than $11 billion for Sun's product portfolio, brand value, and $5.7 billion or so in net cash.

Hewlett-Packard's competitive gesture might suggest that it believes it can have Sun for less by cutting into Sun's brand value while deteriorating its market share. So unless someone else wants Sun at this price, don't expect it to go any time soon -- if at all.

David Gardner was fine with eBay's takeout of PayPal -- he'd made it a top pick in Motley Fool Stock Advisor . Jeff Hwang owns shares of eBay. Your feedback is appreciated at