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* Southeastern talked to potential buyers on Sun's behalf
* Talks with Oracle began after IBM talks collapsed
* Negotiations led by Sun's Schwartz, Oracle's Catz
* Southeastern stands to lose a quarter of investment
By Anupreeta Das and Jim Finkle
NEW YORK/BOSTON, April 20 (Reuters) - Sun Microsystems Inc's JAVA.O largest investor was an invisible hand that guided the high-end computer maker's planned sale to Oracle Corp ORCL.O, people with knowledge with the matter said on Monday.
Even though Southeastern Asset Management, which owns 22.3 percent of Sun, stands to lose money on its investment, analysts say a sale to Oracle at $9.50 a share is far preferable to waiting for Sun's share price -- which hit a low of $2.59 last November -- to recover on the Nasdaq.
Memphis, Tennessee-based Southeastern had spent $2.1 billion to buy 162 million Sun shares over some years, according to regulatory filings. Southeastern would lose roughly $500 million on its investment under Oracle's deal.
But given the economic recession and Sun's fading glory from a high-flying tech titan in the 1990s to a company struggling to cut costs and turn a profit, Southeastern moved wisely when it adopted a more active role last October.
In an Oct. 22 regulatory filing, the firm, which is run by prominent value investor O. Mason Hawkins and has $23 billion in assets under management, said it might go around Sun's board to talk to "third parties" about alternatives.
"Sun has been a serial restructurer which indicates a willingness to adjust to market conditions, but my impressions was that they were always one step behind," said Tom Smith, analyst at S&P Equity Research. "A new buyer may be able to do things better with harsher cuts."
Oracle initially expressed interest in Sun's software assets less than two months ago, said two sources who did not want to be identified as the talks were confidential. But challenges of valuing Sun's intertwined businesses made the board reluctant to sell the company off in chunks, they added.
Sun then entered exclusive talks with International Business Machines Corp (IBM.N), but they fell apart. Oracle said on Monday it agreed to buy Sun for $9.50 a share, valuing its equity at about $7.1 billion [ID:nN20381533].
Southeastern keeps a low profile and prefers to iron out issues with management through private conversations rather than a media blitzkrieg.
In January, Sun agreed to appoint a Southeastern nominee to its 12-member board, former Fannie Mae FNM.N Chief Information Officer and technology veteran Rahul Merchant.
Merchant was also contacted by private equity firm Kohlberg, Kravis, Roberts & Co, whose affiliate KKR Private Equity Investors (KPE) made a $700 million investment in Sun in 2007 in the form of convertible notes, one person familiar with the matter said.
KKR and Southeastern have been in contact about a strategy for Sun, said the source.
KKR did not return calls for comment. A Sun spokesman said the company does not speculate on shareholders' activities.
Sun's board members have spent hours on the phone with each other in recent months, trying to figure out what everyone had in mind for the future of the company, the sources said.
What emerged was a consensus that Sun needed to explore strategic alternatives that would bring maximum value for the company's strong core assets, whether through a restructuring or a sale, the sources said.
The company hired investment bank Credit Suisse CSGN.VX to run the process, sources said. The team, led by star technology banker George Boutros, sent out feelers to almost every potential buyer in the industry, one of the sources said, including Hewlett-Packard Co (HPQ.N), Dell Inc DELL.O, Cisco Systems Inc (CSCO.O) and IBM.
Soon after, IBM and Sun -- which had held informal conversations about a partnership on and off for several months -- entered into exclusive talks in which IBM offered to buy Sun for between $9 and $10 a share, eventually settling at $9.40, the two sources said.
But the talks fell apart about two weeks ago when the two sides could not agree on guarantees that IBM would not walk away from the deal under antitrust regulatory scrutiny.
Meanwhile, both Oracle and HP, which had also talked to Sun about a potential deal last year, remained on the sidelines as interested parties, the sources said. It is unclear if HP, which is still swallowing its $13 billion acquisition of EDS, ever made an offer for Sun.
Some members of Sun's board began pursuing talks with Oracle executives after three-and-a-half weeks of exclusive negotiations with IBM broke down, while others kept a discussion with IBM open, one source said.
Late last Thursday, Sun and Oracle began formal negotiations after the Sun called Oracle and said IBM was "not doable," one person familiar with the talks said.
With IBM out of the picture, Oracle realized it could get its hands on Sun's prized software assets for a per share price in the mid-nine-dollar level, and wouldn't have to bid against another company, the source said.
"They were lightning fast," another source said of Oracle. Discussions were led by executives on both sides -- Sun CEO Jonathan Schwartz and Oracle President Safra Catz doing much of the negotiating, sources said.
Although Oracle CEO Larry Ellison and Sun co-founder and chairman Scott McNealy are long-time friends, the two did not play a big role in negotiations, the source familiar with the talks said.
Oracle spent Friday examining Sun's businesses through a standard due diligence process, spending a lot of time poking around its hardware business.
The two sides signed on the dotted line late Sunday afternoon after drawing deal terms up, the source close to the talks said, adding, "IBM was surprised last night." (Additional reporting by Ritsuko Ando; Editing by Tiffany Wu, Bernard Orr
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