Without IBM: Sun's plan B

NEW YORK (CNNMoney.com) -- With a potential merger deal with IBM on the ropes, Sun Microsystems may have to face an unpleasant plan B: selling off pieces of itself to attract a suitor.

Sun's board rejected International Business Machines Corp.'s $7 billion acquisition offer on Sunday after IBM (IBM, Fortune 500) slashed its original buying price to a little more than $9 a share from its original $10 a share, according to an IBM source. The lower price and IBM's refusal to fully commit to the deal reportedly unnerved Sun's board.

In addition to being one of the largest server makers in the world, Sun (JAVA, Fortune 500) provides services in storage and leadership in open-source software development, including its popular Java product.

Users have been steadily migrating away from Sun products since October 2007, during which Sun's stock has fallen about 74%. Analysts say investors have begun to question the company's business strategy, wondering if any coherence exists between the diversity of Sun's products.

"The company is too complex -- there are parts that others just don't want to take on," said George Weiss, an Sun analyst at Gartner. "Sun will have to take alternatives by either splitting up or downsizing."

Still, whether or not a deal with IBM is resurrected, analysts say the game isn't over for Sun, which has a particularly attractive software business.

"Sun still has several options, since there are parts of the company that could bring value to one or several companies on the market," said Weiss. "But those companies probably won't want to acquire Sun as an entire entity."

For example, the move to so-called cloud computing, in which companies rely on off-site software and servers instead of their own, has caused Sun's core server business to tumble, adding a significant amount of risk to any potential acquisition of the company.

"The company makes great server products, but demand for those products has been declining for about 18 months now," said Andrew Bartels, an analyst with Forrester Research.

Whether or not rejecting IBM was the right move, it appears that Big Blue was Sun's last chance to sell the company as a whole and the company faces a difficult road.

Hewlett-Packard (HPQ, Fortune 500), which is closest in similarity to what Sun offers, is still digesting its purchase of EDS from last year so it's unlikely HP would make a move on Sun. Others are simply unwilling to take on the risk of a Silicon Valley giant that is on the decline during a shaky economy.

"All of this means the company doesn't think they're able to carry on as a viable entity," said Weiss. "The company is not confident in itself in its current state."

As a result, Sun may have no option but to rejigger itself to remain viable.

The leak of the disrupted negotiations between IBM and Sun, as well as talk that Sun went to as many as 20 different possible suitors, has already severely damaged the morale of investors, who sent the stock plummeting 24% on Monday.

The company was already faced with slowing business, a plummeting stock price and an announcement of 5,000 layoffs earlier this year. But now Sun has to go back to its clientele and explain its strategy going forward, attempting to reassure cynical investors and customers that it can be a viable entity.

"The leak was notoriously destructive, because Sun is now faced with a position where they have to reengage with the user community and instill a new level of confidence," said Weiss. "To reverse direction is a difficult row to hoe."