Sun tumbles as IBM talks fail, outlook uncertain

By Ritsuko Ando

NEW YORK (Reuters) - Shares of Sun Microsystems Inc tumbled 22.5 percent after it rejected a $7 billion buyout bid from IBM, leaving the smaller server and software maker vulnerable to lawsuits from shareholders nervous about its viability as a stand-alone

company.

While some on Wall Street held out hopes for bargaining to resume, a source with knowledge of the matter said that talks broke down over the weekend after Sun turned down International Business Machines Corp's offer of up to $9.40 per share.

Sun shares tumbled to $6.58 on Monday afternoon from their close last week at $8.49. But they remain above the $4.97 level before the talks with IBM were first reported on March 18.

Many analysts said that selling itself to IBM may have been the best move for Sun, which has been losing market share, and that the stalled talks underscored its significantly weaker position at the bargaining table.

"It looks like they're in somewhat of a dilemma. It's (Sun's) operational history of the past four to eight quarters doesn't seem to be working well for them, nor have their efforts to sell assets," said Tom Smith, analyst at S&P Equity Research. He downgraded Sun's shares to "sell" from "hold" and lowered its 12-month price target to $6 from $9.50.

Banking sources say Sun has been shopping itself for the past several months, and it appears no bidder other than IBM has raised its hand.

Failed negotiations with IBM could mean Sun would have to contend with an even lower offer, or worse, none at all.

Some analysts said Sun could sell itself in parts to software companies which do not want, or cannot afford, the whole company. Many said such sales would likely bring in less than a sale of the whole company.

Credit default swaps insuring Sun's debt jumped to around 143 basis points, or $143,000 per year for five years to insure $10 million in debt, from around 95 basis points on Friday, according to Markit Intraday.

ANOTHER YAHOO

Some predicted Sun could face anger from shareholders, in the same way that Yahoo Inc co-founder and previous Chief Executive Officer Jerry Yang did after he rejected Microsoft Corp's $47.5 billion bid last year.

Yang eventually stepped down under strong criticism, and was replaced by Carol Bartz. Some analysts say accepting Microsoft's offer would have meant $30 billion in value creation for Yahoo shareholders.

"We sure hope that shareholders don't experience a Yahoo," said Keith Wirtz, president and chief investment officer at Fifth Third Asset Management, which owns both Sun and IBM shares.

While IBM had been negotiating the price downwards, according to a source, the last bid still represented a premium of up to 89 percent on Sun's shares before deal talks were first reported in mid-March.