Without IBM: Sun's plan B

Silicon Valley giant Sun Microsystems may still be able to sell itself to another tech giant, but rejecting IBM's offer makes that road more difficult.

EMAIL  |   PRINT  |   SHARE  |   RSS
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By David Goldman, CNNMoney.com staff writer

How much do you have in your emergency fund?
  • More than 6 months of living expenses
  • 3-6 months of living expenses
  • Less than 3 months of living expenses
  • None

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.

Sun's possibilities

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." To top of page

They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
More Galleries
10 of the most luxurious airline amenity kits When it comes to in-flight pampering, the amenity kits offered by these 10 airlines are the ultimate in luxury More
7 startups that want to improve your mental health From a text therapy platform to apps that push you reminders to breathe, these self-care startups offer help on a daily basis or in times of need. More
5 radical technologies that will change how you get to work From Uber's flying cars to the Hyperloop, these are some of the neatest transportation concepts in the works today. 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: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. 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 2018 and/or its affiliates.