IBM, Sun deal could trigger antitrust scrutiny

By Jim Finkle and Diane Bartz - Analysis

BOSTON/WASHINGTON (Reuters) - The prospect of staid IBM merging with brilliant but troubled Sun Microsystems could spark a bout of antitrust scrutiny in the United States and abroad as customers and suppliers raise concerns about competition.

The merger would give the combined company 65 percent of the $17 billion Unix server market, according to market researcher IDC. These are the big servers that major companies, the government and others rely on for their most critical operations, according to IDC.

International Business Machines Corp (IBM.N) and Sun Microsystems Inc (JAVA.O) were the top two players in 2008, with 37 percent and 28 percent of the market, respectively. Hewlett-Packard Co (HPQ.N) was third, with 27 percent.

While Sun and IBM's machines run incompatible versions of the powerful Unix operating system, IBM is likely to persuade developers to write new software for its machines, said IDC analyst Matt Eastwood. As more programs become available for IBM's Unix fleet, businesses might be persuaded to chose those servers over HP's systems, Eastwood said.

"You will have IBM so dominant that over time that it would be easier to squeeze HP, just by sheer presence," Eastwood said, adding he expected both the United States and Europe to scrutinize the transaction.

IBM and Sun have declined to comment on the deal, but the Wall Street Journal said IBM was offering between $10 and $11 a share, double Sun's closing price of $4.97 on Tuesday, or over $6.5 billion.

High end storage is another area where IBM and Sun dominate.

One business that may come under scrutiny is Sun's StorageTek unit, which provides tape storage for mainframe computers, said Charles King, an analyst with technology research firm Pund-IT.

Sun bought StorageTek in 2005 for about $4 billion, with the result that, together, IBM and Sun control the vast majority of that market, he said.

Ed Black, head of trade group Computer and Communications Industry Association said members were concerned.

"There are numerous companies in the industry that are worried about this consolidation, from storage to servers," he said. "Clearly, the withdrawal of a major competitor in those markets means they would have much less choice."

Black also argued that both IBM and Sun were critical to innovation in "cloud computing" -- where a consumer stores information on the web rather than on a desktop.

"That's a growing area. That's a big area. It is not an area that you want dominated by a couple of companies," he said.

Andrew Chin, who teaches antitrust law at the University of North Carolina, argued that Clinton era regulators had challenged deals on the grounds innovation would be lost.

"Another potentially problematic aspect is that innovation will come from one source rather than two," he added. "Monolithic servers are giving way in the big think of service oriented server architectures to this idea of cloud computing. IBM and Sun are both trying to innovate their way into that."