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Sun Microsystems (JAVA)
IBM-Sun Discussions Come to an End
Sun Microsystems, well known for their computer software and Java programming language, was revealed to have been involved in merger discussions with IBM (IBM: Charts, News, Offers) in mid-March. Sun has been struggling for a couple of years, and looking for a potential merger with a number of companies. IBM was the most recent candidate, and for a while it looked like a deal was quite likely. A few weeks ago, IBM made a pretty generous offer to Sun, but over the weekend, talks appeared to have broken down. What has changed since the initial offer, and what does this mean for the future of Sun Microsystems?
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Sun Microsystems appears to have made some poor decisions over the past few years, including spending too much money on buying out some other companies, and continuing to pour money into a segment of their business that wasn't doing as well. Sun has been unprofitable, and has been losing market share, so for now, searching for a buyer has been their only hope. The original deal that the two companies had on the table was quite significant; IBM was rumored to be offering $10-11 per share, more than double the share price for Sun at that time, which was under $5. The two companies overlap well, and many parties were pushing for this deal to go through.
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However, it appears that Sun wasn't as agreeable as originally hoped. The CEO, Jonathan Schwartz, expressed concerns about the deal, not feeling as though it was good enough for his company. He was surely even less enthusiastic when IBM decreased their offer to just over $9 per share. When IBM reduced their offer, Sun reportedly attempted to change aspects of the negotiations, which was said to have caused IBM to simply walk away. This offer, which equates to about $7 billion, is somewhat shocking when you consider that Sun Microsystems was once valued at over $200 billion. It is undeniable, however, that much has changed since then.
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If this is truly the end of negotiations between Sun and IBM, many analysts expect that Sun won't complete a deal with any company. A few companies, including Hewlett-Packard (HPQ: Charts, News, Offers), have talked with Sun before, and there are a few others who haven't yet moved forward, including Cisco System (CSCO: Charts, News, Offers) and Dell (DELL: Charts, News, Offers), although these companies don't seem to be as good a fit as IBM was. If Sun isn't able to move quickly in another direction, there is a possibility that they will face angry shareholders, upset that the company passed up what was viewed as a good opportunity. Shareholders are obviously already disappointed, as stock prices have plummeted more than 20% to the low $6 range since the announcement was publicized.
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Many analysts are comparing this to the Yahoo-Microsoft discussions in early 2008; Microsoft had ultimately offered a bid of $42 per share, which Yahoo rejected, and Microsoft walked away. Since that point, Yahoo's shares have fallen to approximately $13 per share. There aren't any other promising potential deals on the horizon for Sun Microsystems, so they may be left to try to overcome this difficult situation on their own. The company has been mostly unprofitable the last couple of quarters, has cut thousands of jobs, and is now facing the loss of many of their customers to competitors including IBM. If Sun isn't able to restart communications with IBM, or another company, their only bet is to turn the company around themselves, or their shareholders might not give them another chance.
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