NEW YORK (Reuters) - IBM is in talks to buy Sun Microsystems Inc, sources with knowledge of the matter said, a move that could bolster the technology giant against rivals in the high-end computer server and software markets.
International Business Machines Corp is offering to pay at least $6.5 billion in cash, The Wall Street Journal reported, with the total deal value at about $8 billion, including $1.4 billion of cash on Sun’s balance sheet, or $10-$11 per share. That would be more than double Sun’s Tuesday’s close of $4.97.
Sun shares jumped 79 percent to $8.89, while IBM shares fell 1 percent to $91.95. Both companies declined to comment.
If they reach a deal, it would be IBM’s largest acquisition and bolster its offering of computer hardware, software and services. Sun also brings in clients from the telecommunications and financial services industry, although sales to both sectors have been battered by the banking crisis and competition with HP.
Analysts saw the move as part of a consolidation trend, as Hewlett-Packard Co, IBM and Cisco Systems Inc jostle for control of corporate data centers and compete to supply the high-end computers that power complex corporate transactions and networks, as well as software.
“My feeling is that the good players with good technology and products will eventually get taken out by the bigger guys who have the means to do it and understand that it’s easier to buy them than to mimic them through internal development,” said Zach Rosenstock, analyst at Wayne Hummer Wealth Management.
Sun has long been cited as a takeover target for IBM, HP, Dell Inc or Cisco, which introduced a comprehensive set of data center products earlier this week.
IBM’s move, as well as Cisco’s announcement, could signal a new wave of partnerships in the data center market as companies strive to provide more comprehensive products and services.
Analysts have cited data equipment maker Brocade Communications Systems Inc, infrastructure software maker Citrix Systems Inc and niche network optimization companies, such as Blue Coat Systems Inc and Riverbed Technology Inc, as possible acquisition targets.
IBM’s largest acquisition to date is its $5 billion purchase of Canadian software maker Cognos in 2008. IBM had nearly $13 billion in cash at the end of 2008.
Sun, which rose to prominence in the 1990s, has been searching for a buyer in recent months, according to bankers. While Sun never fully recovered from the dotcom bubble burst in the early 2000s, when demand for servers cratered, IBM by contrast has grown thanks to its shift to software and services from an increasingly commoditized hardware business.
Some analysts said the challenge of valuing Sun’s intertwined software, hardware and services businesses could put off potential buyers.
But many said that Sun would be a good buy for IBM as it could position the company to spring back strongly once the economy recovers, even if it the acquisition means a temporary hit to gross margins.
“You are buying in the heart of a downturn. That’s generally smart thing,” said S&P Equity analyst Tom Smith.
Aside from bolstering market share in data centers, seen as a key area of growth as Internet traffic and energy costs rise, IBM and Sun would certainly up the ante in rivalry with HP and leave Dell in a weaker position, analysts said.
IBM was the top server supplier in the fourth quarter, with a market share of 36.3 percent, according to market researcher IDC. HP has 29.0 percent, followed by Dell with 10.6 percent, Sun with 9.3 percent, and Fujitsu Ltd with 4.2 percent.
These five vendors all posted declines in fourth-quarter server revenue, hurt by pullbacks in corporate spending. The Wall Street Journal said HP had declined to buy Sun, citing a person briefed on the matter. HP declined to comment.
Analysts said IBM and Sun both had spent several years reinventing themselves by shifting their focus from hardware to software and services. Sun has been expanding production of Linux-based computers, although that endeavor failed to revive its stock price and the company has been shedding up to 6,000 jobs, or 18 percent of its workforce.
“If this merger is announced, it will require careful, extensive review by antitrust authorities because of the wide range of tech products both companies now produce. IBM and Sun have been fierce competitors for years,” said Ed Black, head of the Computer & Communications Industry Association in Washington.
“A merger would eliminate a key competitor, which affects choice and prices down the line on numerous IT products,” said Black in an email statement, adding: “We do not need ‘companies too big to fail’ at the center of our critical digital infrastructure.”
Additional reporting by S. John Tilak, Ajay Kamalakaran and Sumeet Chatterjee in Bangalore, Jim Finkle in Boston; Writing by Tiffany Wu; Editing by Derek Caney and Andre Grenon