Collapse of IBM deal could weaken Sun even more

Sales at Sun Microsystems, already under pressure, could take a further hit from the collapse of IBM's multibillion dollar bid.
Sales at Sun Microsystems, already under pressure, could take a further hit from the collapse of IBM's multibillion dollar bid.

The failure of the high-end computer and software company to sell itself might drive customers to its rivals - International Business Machines, Hewlett-Packard; and Dell - say consultants.

"I would hate to be in the Sun sales organisation at the moment," said Eric Johnson, director of the Center for Digital Strategies at Dartmouth's Tuck School of Business. "Pretty much every corporate client is going to ask them: 'Are you going to be here next year when I need help from you?'"

And that is raising the stakes for Sun's board and Chief Executive Jonathan Schwartz to show there is another plan for turning around the struggling computer maker.

A company's attempt to sell itself often alarms customers by raising a host of tricky questions, such as whether the new owner will continue to add new features to the products they've already bought or to keep providing strong support.

He said those exact questions came up on Wednesday morning during a breakfast meeting with technology executives.

In response to an inquiry from Reuters, Sun said such concerns are unfounded.

"Sun is committed to our customers and channel partners, and will continue to do what has always defined the company: innovate for customers," a company spokesman said in a statement.

Sun, which rode the Internet boom to prominence in the 1990s, may be working to address such concerns.

Its board was scheduled to meet on Wednesday, according to a Bloomberg News report, which cited a person familiar with the situation.

A spokeswoman for Sun declined to comment.

Enderle Group analyst Rob Enderle said the collapse of the talks damaged Sun's credibility with its biggest customer group: the financial services industry, which relies on high- end Sun servers to handle critical tasks such as trading and other banking transactions.

"Now that it is widely known that Sun is actively shopping itself around, Sun represents a substantial risk," said Enderle at the San Jose-based technology consulting and research firm.

"It is not certain that the company will be there to support its equipment. In this market, that kind of risk can drive customers to other players."

Analysts said an IBM deal would have assured Sun's customers it would continue to support its products.


The withdrawal of the offer last weekend comes at a difficult time for Sun, which is firing thousands of workers as sales slow. It posted a US$1.9 billion loss for the six months to December 28 on a 9 per cent drop in sales to $6.2 billion.

Armonk, New York-based IBM has no plans to take the lead in restarting negotiations, said a person familiar with the matter not authorised to speak publicly.

But speculation IBM would eventually buy Sun helped pull stock in the Santa Clara, California, company up 6 per cent to a US$6.66 close in heavy Nasdaq trading on Wednesday. That compares with $4.97 on March 17, the day before news broke of the IBM negotiations.

Before talks broke down, IBM put a ceiling of $9.40 on its offer, according to a person familiar with the talks.

Customers who do stick with Sun will likely try to use its financial problems and the fallout from the collapse of its negotiations with IBM to demand bigger discounts.

"They are clearly in a weakened position," said Laura DiDio, an analyst at ITIC, a research and consulting firm.

"The customer is going to say: 'Hey, I don't know what is going on with you. I may be better off going with IBM or HP. What are you going to do for me?' That may have a material impact on revenue and profit margins for the immediate quarter."

Once news of the IBM talks leaked out, Sun passed a critical point of no return because negotiating was essentially an admission it needed help, said Charles King, an analyst at consulting firm Pund-IT.

"It's a bit like somebody who has had a serious accident checking out of the emergency room and insisting they can heal themselves at home," King added.

BY Jim Finkle

(Additional reporting by Ritsuko Ando and Anupreeta Das)

Copyright 2009 Reuters.



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