Our Terms of Service and Privacy Policy have changed.

By continuing to use this site, you are agreeing to the new Privacy Policy and Terms of Service.

Breaking Views

Sun not shining on an IBM deal

Holding out for a higher price might have worked a year ago, but sellers who want deals have to adjust to a new reality.

By Lauren Silva Laughlin and Robert Cyran, breakingviews.com

(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. To top of page

Company Price Change % Change
Freeport-McMoRan Inc... 10.50 0.31 3.04%
Bank of America Corp... 16.36 -0.08 -0.49%
Apple Inc 113.29 0.37 0.33%
Intel Corp 28.42 0.70 2.53%
Alcoa Inc 9.41 0.55 6.21%
Data as of Aug 28
Index Last Change % Change
Dow 16,643.01 -11.76 -0.07%
Nasdaq 4,828.33 15.62 0.32%
S&P 500 1,988.87 1.21 0.06%
Treasuries 2.19 0.02 0.83%
Data as of 7:00am ET
More Galleries
The stock market's wild week in 6 pictures It was the wildest week in stocks in recent memory. Here's photos and CNNMoney's tweets of reactions to the panicked selling on Monday and Tuesday, which gave way to a mad buying scramble on Wednesday and Thursday. And then...a selloff on Friday again. More
How New Orleans is learning to live with water After Hurricane Katrina, the city of New Orleans had to reinvent the way it manages water and protects itself from future storms. More
Your degree will earn you the most from these colleges Art majors can make big bucks, too. Find out which school has the highest paid grads in your major. More
Sponsors
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play