Sun-Oracle deal isn't a big loss to IBM

The tech giant will have to deal with one of its chief rivals absorbing a former coveted asset, but analysts say IBM will be just fine.

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By David Goldman, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- The acquisition of Sun Microsystems by International Business Machines' rival Oracle on Monday came just weeks after Sun's negotiations with IBM failed.

Still, analysts don't think Big Blue is losing out in the deal, despite having long coveted Sun and its Java platform, which it uses extensively in its software products.

Software giant Oracle's $7.4 billion deal for Sun (JAVA, Fortune 500) trumped IBM's reported $7 billion offer, which was first reported in March. Negotiations between Sun and IBM fell through two weeks ago after IBM reduced its offer by about $1 per share and Sun expressed concerns that its potential acquirer had too much freedom to pull out of the deal.

"IBM was interested in buying Sun for a reasonable price, but the first price they offered was reasonable," said Doug Christopher, analyst with Crowell, Weedon & Co. "As the price came lower, you had to wonder how much they really wanted Sun in the first place."

"IBM has done well without Sun so far, and as a widely integrated company, it will continue to do well without them," he added. "I don't see this as being significant for IBM."

IBM (IBM, Fortune 500), which never publicly stated it was in negotiations with Sun, said it would not comment on the Oracle-Sun deal.

Sun piqued IBM's interest because of its strong open-source software business, which could have helped IBM take a bigger bite into the market share of rivals such as Microsoft (MSFT, Fortune 500) and Oracle (ORCL, Fortune 500). Open-source software, like Sun's MySQL product and Java platform, is usually free and allows computer programmers to modify the software for end-users. Proprietary software, like Microsoft Office, can be costly and cannot be changed.

"Sun going to a competitor is something they'll have to deal with, but ultimately it won't be that critical of a factor," said Phil Hochmuth, analyst with Yankee Group. "It could make things a bit more complicated for IBM, but that doesn't mean it has to move away from that technology."

The real threat, analysts say, would come if Oracle decides to make Sun's software products proprietary, charging IBM for their use or forcing IBM to start from scratch and develop a similar product. But analysts say that's very unlikely, as the open-source market is one that many believe to be the next big thing: the free, easy-to-manipulate programs that have grown in popularity recently, especially during the recession, as businesses and consumers aim to trim costs.

"IBM does have to be a bit concerned that Oracle could take all of the open source software that they've acquired and make them more proprietary, making them less useful to IBM," said Andrew Bartels, analyst with Forrester Research. "It's possible that Oracle would do that to take out a competitor, but if they do that, they lose the value of open source."

Oracle's disadvantage is IBM's advantage

One potential advantage for IBM in the Oracle-Sun deal is Oracle now must address Sun's troubled server business. The move to so-called "software as a service" or 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 for Oracle.

"You have to wonder what Oracle is going to do with that hardware business," said Bartels. "IBM may get to sit back and wait to see how Oracle manages, because it's possible Oracle got stuck to a tar baby."

Unlike IBM, Oracle is strictly a software business and has no experience with hardware. Though some believe Oracle has enough financial wherewithal to successfully merge Sun's server business with its software, others believe Oracle will ultimately have to sell that business off. To top of page

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