Web powerhouse Sun Micro poised at brink of IBM's maw

SANTA CLARA, California (Reuters) - Its name was once synonymous with the Internet. It championed networking at a time most people thought e-mail was revolutionary. It used to be mentioned in the same breath as Microsoft and Intel.

A Sun Microsystems sign is pictured at the company's headquarters in Santa Clara, California March 18, 2009. REUTERS/Robert Galbraith

Now, Sun Microsystem’s biggest coup may well be selling itself to one of the industry’s oldest names at a sky-high premium, spelling perhaps the end of an era for a loss-making firm that shed virtually its entire stock value in under a decade.

IBM is in talks to buy Sun to bolster its leading hold on the high-end computer market against rivals such as Hewlett-Packard, sources and analysts say. Big Blue is offering to pay over $6.5 billion or double Sun’s Tuesday closing price of $4.97, The Wall Street Journal reported.

Both companies declined to comment.

That may not sit well with the troops at Sun, which -- despite its roller-coaster history -- still inspires fierce loyalty among its own ranks and customers.

“It’s going to be difficult for us to be IBMers,” a 50-year-old software program manager lamented as she crossed its sprawling Santa Clara campus. “We still have a start-up mentality, somewhat laid-back... From my perspective, IBM is more blue suits and bureaucracy.”

“We take names and we kick butt,” the 20-year Sun veteran added as an afterthought.

Few companies embody the rise and fall of dotcom as much as Sun, whose name stands for Stanford University Network and whose campus resembles that of the college, with a palmtree-lined drive leading up to a grassy courtyard and clocktower.

During the heady days of 2000-2001, the company -- led by firebrand co-founder and Harvard-Stanford alumnus Scott McNealy -- took on Microsoft.

McNealy -- who grew Sun from a Silicon Valley start-up to a globe-spanning firm with 38,000 employees -- took on Microsoft, calling his rival’s proprietary Windows software “a giant hairball” and touting his own open-software philosophy.

He lost. Windows went on to dominate the PC platform and Microsoft eclipsed the firm in both size and market share.

The popular image of IBM as a mass of navy suits is in stark contrast to Sun, where the chief executive sports a ponytail. Analysts differ in their opinions as to whether that cultural difference goes deeper than looks.

“When I worked at IBM in the ‘90s, we used to take bets on how long a Sun executive would last when we hired them away: the average was nine months,” said Rob Enderle, an analyst with the Enderle Group.

An IBM human resources executive argued the company was both diverse and flexible.

“I’m wearing a yellow tie, green suit and loafers,” he said.


IBM was once known for its reluctance to fire people, experts say, and still remains less willing than, say, Sun, which in November said it would lay off up to 6,000 of its staff, or 15-18 percent of its workforce.

Reactions at Sun’s campus, an hour’s drive from San Francisco, ranged from the fearful to the incredulous. Many were nervous about losing jobs at a time the United States is going through its worst economic contraction in over 20 years.

“The feeling is mixed, right? If we get bought, we lose a lot of people,” said a 28 year-old chip designer who had worked for Sun over the past four years. “If we don’t get bought, we’ll lose people.”

Others were skeptical, with management keeping mum so far.

“Fujitsu or Cisco maybe, but not IBM,” said a 50-year-old engineer as he puffed away at a cigarette on the parking lot with three of his colleagues.

“There’s so much overlap with IBM, I’m not sure why they would buy Sun. I’m sure there’s something else.”

Investors too have questioned Sun’s worth. The firm has seen its stock sink more than 70 percent in the past year alone. That downward spiral belied the firm’s meteoric ascent of the past two decades.

Sun began life in 1982. One year later, it signed a $40 million contract with manufacturers. By 1988, the company had $1 billion in revenue, and joined the ranks of Fortune 500 companies by the early 1990s.

Java, a software platform that allows applications to run on any computer, was introduced in 1995.

Sun shares peaked in 2000 at just under $260, but then had hemorrhaged more than 98 percent of their value before Wednesday’s 80 percent surge.

Sun’s market capitalization was about $3.5 billion, a mere shadow of its former self, before talk of the negotiations became public.

“If the deal does happen, this is an admission that the company could not make it on its own,” BMO Capital Markets’ Keith Bachman wrote on Wednesday.

Writing by Edwin Chan; Editing by Phil Berlowitz