Should Sun sell to IBM?

"Put them out of their misery," says one analyst.

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By Jessi Hempel, writer and Jon Fortt, senior writer

(Fortune) -- Computer giant IBM reportedly is mulling a $6.5 billion acquisition of Sun Microsystems (JAVA, Fortune 500), a combination that would bolster Armonk-based IBM's ability to deliver new services to corporate customers, including software and other applications delivered over the 'Net.

The potential deal, which first was reported by The Wall Street Journal, also could help IBM (IBM, Fortune 500) improve margins in its so-called technology services business. IBM, like other services companies such as Hewlett Packard (HPQ, Fortune 500), buys a lot of computer hardware from Sun. By owning Sun the tech company would be able to boost profitability in that business, though the company would probably take a short-term hit because Sun is losing money right now.

The sale of Sun would close the chapter on one of Silicon Valley's most dramatic rise-and-fall stories. After a terrific run selling servers during the dot-com boom Sun struggled to find success in new businesses. "Someone had to bail them out and put them out of their misery," says Bruce Richardson, chief research officer with AMR Research. IBM, he says, "may end up with some pretty good technology that is totally complementary."

Indeed Sun's software and storage assets should not be dismissed. (Sun has done some good stuff lately with flash-based storage, for example.) And IBM probably knows its intergalactic sales force can sell Sun's ideas better than Sun can. (A classic example is Java. Sun came up with it, but IBM has done a much better job actually making money from it.)

Richardson says a Sun deal would help move IBM deeper into the world of "cloud computing," in which applications are housed on servers in data centers and other locations and simply delivered to end users via networks like the Internet. "Cloud is the next battleground, and IBM is gearing up for it," he says.

Sun would help IBM fend off HP, which has become the No. 2 services provider in the world thanks to its acquisition last year of Electronic Data Systems. IBM also faces fresh competition from Cisco Systems (CSCO, Fortune 500), which this week said it would start selling servers.

The big question for IBM, however, is whether buying Sun is the best way to spend $6.5 billion.  To top of page

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