Sun rejects IBM's $7bn offer, talks fail

NEW YORK, USA: IBM's talks to acquire smaller computer and software rival Sun Microsystems Inc broke down on Sunday after Sun rejected IBM's $7 billion offer, a source said.

The collapse of negotiations, if final, is likely to hurt Sun's shares, as a buyout was seen as a means of survival for the once-storied Silicon Valley company, which has been losing market share. A deal would also have helped IBM compete more effectively against rivals such as Hewlett-Packard Co.

Sun was unhappy with International Business Machines Corp's offer of $9.40 per share or below, and that it was unclear if talks would resume, the source added.

IBM scraps Sun's offer to $9.55/share

The bid represented a premium of up to 89 percent on Sun's shares before deal talks were first reported last month.

"Sun is now sort of damaged goods," said Peter Falvey, a technology banker at Revolution Partners. "If IBM got under the covers and didn't like what they saw, then what does that mean for other potential buyers?"

An IBM spokesman declined to comment, while Sun officials did not return calls.

Sources told Reuters last month reported that IBM was in exclusive talks to buy Sun and had proceeded to the due diligence stage. One source had said on Saturday that IBM lowered its offer price for Sun to $9.50 a share from $9.55 a share and that a deal may be announced this week.

Sun shares had risen to $8.49 on Friday, from $4.97 on March 17, a day before talks between the two technology companies were first reported. The Wall Street Journal had previously said IBM's original bid was $10-$11 a share.

The collapsed talks are expected to damage the smaller Sun more than IBM, the world's largest technology services provider, which has fared relatively well despite the global economic slump thanks to its outsourcing business and its shift from hardware to higher-margin software sales.

Kaufman Brothers analyst Shaw Wu said it was a mistake for Sun to reject the bid, citing the leap in Sun shares since reports of the deal talks.

"The acquisition is already factored into the market's thinking. To reject it over 50 cents a share, or whatever it may be, doesn't seem like a very prudent move," Wu said.

Sun posted an 11 percent decline in quarterly revenue for its fiscal quarter ended Dec. 28, while gross margins shrank to 41.9 percent from 48.5 percent from a year earlier.

The company rose to prominence selling high-end computer servers in the 1990s but never fully recovered from the dotcom bubble burst earlier this decade. Analysts also say it has failed to fully capitalize on its software assets including Solaris and Java.

Some analysts have thought from the start that a deal between Sun and IBM could prove difficult, particularly due to the likelihood of intense antitrust scrutiny.

The merger would give the combined company 65 percent of the $17 billion high-end Unix server market, according to market researcher IDC.

Failed negotiations with IBM could mean that Sun will need to look for another buyer, and contend with a lower offer. But no bidder other than IBM has emerged in the months that Sun has been shopping itself.

The Wall Street Journal reported that Sun had demanded assurances from IBM that it would proceed with the deal in the face of regulatory challenges, fearing IBM's offer left too much room for it to walk away.

Negotiation Tactic

While a deal was widely seen as more crucial for Sun than for IBM, many analysts had also said it would help IBM, if the company is able to cut costs and make better use of Sun's assets.

IBM shares have also risen 10 percent since the negotiations were first reported, helped by an upswing in the overall market.

Tim Ghriskey, chief investment officer for Solaris Investment Management, which manages about $2 billion, said the latest developments could be part of negotiating tactics and that Sun is still likely to strike a deal at around $9.40 a share and that IBM was still the most likely buyer.

"Like any acquisition candidate they are trying to force the highest bid possible," Ghriskey said. "IBM doesn't necessarily need these assets. But I think they could probably benefit from them at a reasonable price."

Buying Sun would hand IBM a clear lead at the high end of the $45 billion overall server market fought over with Hewlett-Packard.

Source: Reuters