* Talks collapse over price
* IBM's offer was $9.40 or lower
* Unclear if talks will resume
(Adds background on talks)
By Ritsuko Ando
NEW YORK, April 5 IBM's (IBM.N) talks to
acquire smaller computer and software rival Sun Microsystems
Inc JAVA.O broke down on Sunday after Sun rejected IBM's $7
billion offer, a source with knowledge of the matter said.
The collapse of negotiations, if final, is likely to hurt
Sun's shares as a buyout was seen as a means of survival for
the once-storied Silicon Valley company, which has been losing
market share. A deal would also have helped IBM compete more
effectively against rivals such as Hewlett-Packard Co (HPQ.N).
The source, who was not authorized to speak publicly about
the matter, said Sun was unhappy with International Business
Machines Corp's offer of $9.40 per share or below, and that it
was unclear if talks would resume.
The bid represented a premium of up to 89 percent on Sun's
shares before deal talks were first reported last month.
"Sun is now sort of damaged goods," said Peter Falvey, a
technology banker at Revolution Partners. "If IBM got under the
covers and didn't like what they saw, then what does that mean
for other potential buyers?"
An IBM spokesman declined to comment, while Sun officials
did not return calls.
Sources told Reuters last month that IBM was in exclusive
talks to buy Sun and had proceeded to the due diligence stage.
One source had said on Saturday that IBM lowered its offer
price for Sun to $9.50 a share from $9.55 a share and that a
deal may be announced this week.
Sun shares had risen to $8.49 on Friday, from $4.97 on
March 17, a day before talks between the two technology
companies were first reported. The Wall Street Journal had
previously said IBM's original bid was $10-$11 a share.
DEAL FACTORED IN
The collapsed talks are expected to damage the smaller Sun
more than IBM, the world's largest technology services
provider, which has fared relatively well despite the global
economic slump thanks to its outsourcing business and its shift
from hardware to higher-margin software sales.
Kaufman Brothers analyst Shaw Wu said it was a mistake for
Sun to reject the bid, citing the leap in Sun shares since
reports of the deal talks.
"The acquisition is already factored into the market's
thinking. To reject it over 50 cents a share, or whatever it
may be, doesn't seem like a very prudent move," Wu said.
Sun posted an 11 percent decline in quarterly revenue for
its fiscal quarter ended Dec. 28, while gross margins shrank to
41.9 percent from 48.5 percent from a year earlier.
The company rose to prominence selling high-end computer
servers in the 1990s but never fully recovered from the dotcom
bubble burst earlier this decade. Analysts also say it has
failed to fully capitalize on its software assets including
Solaris and Java.
Some analysts have thought from the start that a deal
between Sun and IBM could prove difficult, particularly due to
the likelihood of intense antitrust scrutiny.
The merger would give the combined company 65 percent of
the $17 billion high-end Unix server market, according to
market researcher IDC.
Failed negotiations with IBM could mean that Sun will need
to look for another buyer, and contend with a lower offer. But
no bidder other than IBM has emerged in the months that Sun has
been shopping itself.
The Wall Street Journal reported that Sun had demanded
assurances from IBM that it would proceed with the deal in the
face of regulatory challenges, fearing IBM's offer left too
much room for it to walk away.
While a deal was widely seen as more crucial for Sun than
for IBM, many analysts had also said it would help IBM if the
company is able to cut costs and make better use of Sun's
IBM shares have also risen 10 percent since the
negotiations were first reported, helped by an upswing in the
Tim Ghriskey, chief investment officer for Solaris
Investment Management, which manages about $2 billion, said the
latest developments could be part of negotiating tactics and
that Sun is still likely to strike a deal at around $9.40 a
share and that IBM was still the most likely buyer.
"Like any acquisition candidate they are trying to force
the highest bid possible," Ghriskey said. "IBM doesn't
necessarily need these assets. But I think they could probably
benefit from them at a reasonable price."
Buying Sun would hand IBM a clear lead at the high end of
the $45 billion overall server market fought over with
It would also broaden IBM's software portfolio, add storage
products that vie with EMC Corp EMC.N and Network Appliance
Analysts have said Sun's software could also help IBM
compete with Microsoft Corp (MSFT.O), as well as Cisco Systems
Inc (CSCO.O), which some see as IBM's biggest rival in the long
Both Cisco and IBM have been expanding beyond their
traditional products to new technologies like "cloud
computing," in which companies store data and computing power
in remote data centers accessed over the Internet, rather than
buy their own computer equipment.
(Additional reporting by Jim Finkle in Boston, and Anupreeta
Das and Megan Davies in New York; Editing by Tiffany Wu, Martin
Golan and Ian Geoghegan)