Sun not shining on an IBM deal

(breakingviews.com) -- Not all sellers are adjusting to the new merger market. Dealmakers - like the U.S. lawyers and bankers gathered in New Orleans last week - were hopeful that the expectations of buyers and sellers are aligning.

But deals like IBM's planned purchase of Sun Microsystems, which is now on the rocks, suggest such optimism is premature.

On the face of it, IBM's $7 billion deal to buy Sun Micro seemed surefire. Sun's major market, servers, is imploding. So it was shopping itself around. IBM's terms seemed generous. It was said to be offering a premium of more than 100%.

But the seller wanted both certainty and a high price from IBM (IBM, Fortune 500). Afraid that the deal offers too much room for the buyer to walk - and too little assurance on antitrust matters for the offered price - Sun's feet turned cold.

Its hesitation might have worked well in negotiations last year. But sellers that recently made it to the altar have adapted to new post-crisis financial realities.

Pfizer's $65 billion takeover of Wyeth (WYE, Fortune 500) is a case in point. The buyer actually included what bankers call a "financing out" - meaning if Pfizer (PFE, Fortune 500) couldn't get the money to pay from lenders, it didn't have to close the deal.

This type of uncertainty used to make sellers wince. Dow Chemical (DOW, Fortune 500), for example, was still responsible for buying Rohm & Haas even after part of its financing fell through. That agreement was only struck in July 2008. How things have changed.

Pfizer's deal showed that some sellers recognize the need to accept terms and conditions once considered anathema. Of course, Pfizer-Wyeth may have given dealmakers a false sense of hope.

Sun (JAVA, Fortune 500) shows not every seller has woken up. Still a failed Sun deal might paradoxically help. The board will face shareholders' vitriol if they turn down a generous IBM offer, potentially offering a powerful example to those that ignore the new realities.