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
Kinder Morgan Inc 41.35 -0.97 -2.29%
Halliburton Co 42.20 -5.14 -10.86%
General Electric Co 26.49 -0.38 -1.41%
Bank of America Corp... 17.04 -0.07 -0.41%
Apple Inc 118.93 -0.07 -0.06%
Data as of 1:02pm ET
Index Last Change % Change
Dow 17,828.24 0.49 0.00%
Nasdaq 4,791.63 4.31 0.09%
S&P 500 2,067.56 -5.27 -0.25%
Treasuries 2.19 -0.04 -1.79%
Data as of 10:43pm ET
More Galleries
Want to buy -- and live in -- a piece of history? It's not that far out of reach. These historic homes are not only for sale, they are incredible bargains. More
5 ways retailers are tracking you If you think pesky salespeople are invading your personal space, check out these 5 technologies that are tracking your movements throughout a store. More
Moto X vs. Droid Turbo: Which Droid should you buy? Motorola has made the two best Android smartphones this year. Here's how they stack up. More
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

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.