IBM's potential purchase of Sun: Here's why it makes sense

IBM's potential purchase of Sun: Here's why it makes sense

Summary: IBM is reportedly in talks to buy Sun Microsystems for $6.5 billion and the deal is long overdue.

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IBM is reportedly in talks to buy Sun Microsystems for $6.5 billion and the deal is long overdue. The companies mesh on the open source software front, Sun is struggling and IBM can consolidate some server market share. 

First, the headlines. The Wall Street Journal is reporting that IBM could acquire Sun as early as this week (Techmeme). IBM would pay all cash for Sun. The Journal also reported that Sun has approached a number of large companies about an acquisition; a move that throws cold water on CEO Jonathan Schwartz's everything is fine video

Dana Gardner counterpoint: IBM buying Sun Microsystems makes no sense, it's a red herring

Schwartz: Perhaps this IBM deal looks pretty good after all. Will the pony tail go?

Behind the scenes here, we've frequently had chats about how IBM would take out Sun. The only real debate was whether Big Blue would acquire Sun in parts or as one sum. The working assumption was that Sun would be broken up and sold in parts, but the IBM deal also works nicely. Here's why the deal makes some sense:

IBM can acquire server and storage share. Sun still has a lot of hardware on the market in key verticals such as finance and telecom. The problem is that Sun is reliant on U.S. sales and that's not a fun place to be right now. With Cisco entering the server market the profit margins could be squeezed---especially if the server essentially becomes a storage and networking box too. By acquiring Sun, IBM gets more scale so it can endure the margin squeeze. That same argument holds for storage hardware too. 

There are issues to be worked out on the hardware side though. IBM has refrained from commodity servers and Sun plays in that space. Meanwhile, servers run on different chips--Sun has Sparc and IBM has the Power architecture.

The time is now. IBM is a software and services company, but it needs hardware, which would be roughly a third of revenue with Sun, to sell its other offerings. Hardware is often the entry point for IBM's software and services. With a stronger hardware business it can fend off HP in the marketplace.

Sun is a powerhouse in Unix, which is still a key platform, but isn't exactly gaining in the market these days. IBM could acquire Sun and establish two key beachheads: Linux and Unix. The former will ultimately take over for the latter in the data center. IBM can play both and sell you the services to migrate while it’s at it. Bonus for Big Blue: Sun would enable it to pressure HP's Unix-based businesses too.

One problem: IBM sells AIX Unix servers. Sun sells Solaris (hat tip to a reader pointing that out).

Sun has to do something. Sun is a company that has to transition a legacy hardware business to one modeled more on open source software and services. That's a wrenching change that may not work out. An exit ramp makes sense right now. Besides, Sun was reportedly turned down by HP and Dell was mum. 

This about HP NOT Cisco. The initial headlines will paint IBM's move as a reaction to Cisco's entry into the data center. The reality is HP is the target. HP acquired EDS to directly take on IBM. IBM is returning the favor by squeezing HP on hardware. 

Open source software. Sun's future is offering an open source stack of software led by MySQL at its core. IBM is all about open source. The two together make a lot of sense and IBM could pull MySQL, Lotus, OpenSolaris and other parts together in a nice stack. In addition, Sun's open source software needs distribution---it recently did a deal with HP. IBM has distribution galore. Matt Asay has a good post on how IBM can monetize open source

One problem: There's a lot of software overlap here. In databases, IBM has DB2 and Sun has MySQL.

Java. Java is arguably Sun's best asset, but the platform was never monetized. Perhaps IBM will have better luck.

Cloud computing. Sun has some interesting ideas on cloud computing and its plans could work. Sun has also made targeted cloud computing acquisitions. Meanwhile, Sun has a cloud computing press conference Wednesday morning, a shindig that will be dominated by IBM talk now. A few folks seemed to buy that Sun-as-cloud-player marketing, but it really looks like a relabeling to me. IBM could absorb Sun's plans in its big cloud services offering. Also see: Handicapping cloud computing: The big picture.

It's about consolidating the data center. Data center managers will want fewer throats to choke and Cisco isn't going to make life easier. Sun can allow IBM to consolidate a data center rival and bring things back to equilibrium now that Cisco has entered the market. 

What could go wrong? A few items. For starters, there are regulatory concerns. Who knows whether the Obama administration would approve this deal. IBM would have roughly 42 percent of the server market with Sun, according to IDC. HP, however, would be second wind 29.5 percent. With Dell a strong No. 3 with 11.6 percent share the IBM-Sun deal should pass scrutiny. But it is a wild-card. 

Here's a look at the server market share standings:

And then there's culture. If you want to know the big cultural difference look no farther than Schwartz's ponytail vs. IBM's typical look. IBM is all business and Sun is sort of business with a lot of Silicon Valley shtick. That said Sun's workers may find themselves relieved by the IBM deal. Sun's upcoming struggles are fairly obvious and IBM looks like a great option for those that choose to look ahead.

Update: Sun shares had a predictable response to the news, soaring 72 percent in premarket trading. 

Update 2: Pondering the valuation: As of its most recent quarter, Sun had $2.6 billion in cash, equivalents and short-term marketable debt securities. So the rest of the business is worth $4 billion roughly. One working theory is that IBM would potentially buy Sun and sell the hardware business to Fujitsu, a close partner of Sun. IBM could license Solaris, since it would own the code, to Fujitsu. Assuming IBM does sell some hardware assets to Fujitsu for $1 billion or so the Sun acquisition doesn't look so large. 

Meanwhile, analysts are mixed on the deal. UBS analyst Maynard Um says in a research note:

Our Sun thesis has been that there is a potential restructuring story given relative inefficiencies. We do think IBM would be in a position to take out cost more quickly, however, we expect Sun revs to continue to be pressured in FY09 & FY10 given its reliance on high end servers and limited ability to monetize its software. And while IBM is certainly financially capable of purchasing Sun, we would note that a $6.5bn acquisition would be large even by IBM’s standards, and would also be a deviation from IBM’s current strategy of tuck-in acquisitions.

Topics: Cloud, Data Centers, Hardware, IBM, Open Source, Oracle, Servers, Storage

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  • Exciting!

    Wow! This sounds like a great combination. I hope it happens.
    linuser
  • I don't get it.

    Lots of blathering about open source, but the thing about open source is that it is free, you don't have to acquire anybody to play in it. IBM can easily do whatever they want in open source without buying Sun. Buying the hardware side isn't helping because that is where they are losing tons of money.

    You left out the most important point: buying Sun to kill the brand and the SPARC architecture. If anything, IBM would pay $6B just to eliminate a competitor from the market. They get a little back by harvesting the IP portfolio, cherry-picking the top ten percent of engineers and software designers, and milking break-fix services which are all outsourced anyway. Sun sets slowly in the west and is never seen or heard from again.

    It's actually not a bad deal for IBM who has the cash, and not too bad for HP or Dell either, because they get to sit on the sidelines and snap up defecting customers for no money expended. Sun customers and employees will not fare so well.
    Manny_Wacker
    • Your Sparc point may have some validity....

      However, Sun has something else that could be just as
      important; something that Apple is reportedly using in
      the next iteration of OS X: ZFS. I can't see anyone
      spending $6.5B just to shut down a competitor; that
      would be monopolistic behavior. However, since IBM
      and Apple once had a partnership in producing the
      Power PC architecture and Apple is now licensing ZFS
      from Sun, doesn't it seem likely that IBM wants to
      embrace something that could garner more
      performance out of existing hardware, extending the
      usable lifetime and value of IBM's products, which
      would incidentally also mean higher profit margins on
      products sold?

      No, I'm not saying Apple is directly involved, here; I'm
      saying that because of Apple's foresight, IBM has
      realized an opportunity which may make a significant
      difference in who excels in the server market. As long
      as Microsoft holds dominance in the enterprise,
      companies like Sun and IBM, and yes, even Apple, will
      struggle to compete. By consolidating and cooperating,
      IBM could regain its status as the #1 business machine
      manufacturer in the world, even if their software runs
      on another brand's hardware.
      Vulpinemac
      • ZFS is OS

        Sun opened up ZFS not long after creating it. So if Apple is going to be using it (they are suppose to be but as of now its just rumor/speculation) I would imagine they would not be licensing it from anyone and would be using the OS release.

        SPARC and Solaris are very well respected for the performance and reliability. IBM has a Unix plate, but that biz takes a back seat to the mainframe and their various services.

        I would think that IBM would dump AIX for Solaris, but dump SPARC and keep Power. The Power architecture has lots of potential, and its derivatives are seen in everything from video game CPU's (WII, PS3, and XBox all use a Power derived CPU) and other offerings as well.
        SPARC doesn't have that kind of penetration.
        morgande
        • But SPARC does have better multithreading than Power.

          And while I would think that would be attractive, SPARC has been open sourced as well so IBM could easily license it that way.
          The fact is though, that ZFS would be a big step for AIX. Add to that DTrace, COMSTAR and the ability to run more threads than any other *NIX OS (this is the reason Intel has a licensing agreement with Sun) and it gets interesting. Also, remember that IBM resells Solaris today, so there are more existing ties than it appears.
          914four
        • ZFS / Apple

          Well, with Sun's potential takeover and technologies like ZFS at least under architectural control, IBM would have more than one asset against Apple.

          Not just that chip maker guy who Apple wanted to hire, but so far he seems to wait until at least his "notice" period is over...
          catmedia
      • Problem is that Microsoft doesn't hold dominance

        in the enterprise market when it comes to IBM and HP. Microsoft only dominates the software side of things whereas IBM has hardware, software, and services in the enterprise market and IBM still leads Microsoft when it comes to enterprise services. As for monopolistic behavior, IBM also has track record of acting a monopoly, so it wouldn't surprise me if they tried to eliminate a competitor.
        alaniane
      • IBM knows from monopoly ...

        "... that would be monopolistic behavior."

        I guess you missed "U.S. v. IBM in the United States District Court for the Southern District of New York" where IBM was ruled to have created a monopoly? Old habits die hard ...
        Manny_Wacker
        • Re: monopoly

          Except the Java brand, there is nothing IBM could acquire here, that's totally uniqe. And comparable to a monopoly. However, since even Sun's quasi monopoly over the Java brand has never made them as big or rich as Microsoft still ist, IBM secretly added significant parts to the JDK (most of them from their venture with Apple called Taligent, later turned into OTI/Eclipse ;-) and also their own JDK implementations, there is no monopoly to that either.

          IBM, Sun and Oracle are beside Open Source vendors like Apache the main JVM vendors. Even if IBM and Sun merge their products in the future, that still leaves 3 or more independent vendors, just on the SE/EE side. Not to mention JavaME (although that's a different story)

          Sun is with OpenOffice the only serious and competitive vendor of office products. Not too profitable, and maybe less a market share than e.g. Firefox has re-gained from IE in the browser market. However, that is rather a monopoly-breaker as only office product beside Microsoft.

          Same with MySQL where Oracle and IBM's own DB2 beside a few other vendors (including Microsoft, but they're hardly significant in this segment) are the 2 dominant vendors. But if you call anything close to monopoly, it'll be Oracle.

          App servers are dominated by Oracle (including and thanks to BEA), IBM, Red Hat and a few more vendors. Most of them Open Source like Apache or OSGi followers like SpringSource & Co.

          Again for IBM this could only mean consolidation and better control over the Java Specs for App Servers, but no commercial monopoly as such.
          catmedia
    • cherry-picking

      Well, everybody keeps focused on Sparc vs. PowerPC or Intel here, and maybe Solaris vs. AIX.

      The real assets are Java, then maybe Solaris and a couple of server-related technologies, as well as storage such as ZFS.
      Also OpenOffice which IBM may keep as the only serious alternative to Microsoft Office. After they took over Lotus quite a few years ago (remember their products, e.g. 123 ?;-)

      Losers are most likely NetBeans. Unlike Oracle who decided to keep their crappy old JDeveloper still pretty much based on JBuilder 1 and 2 and dump WebLogic Workshop purchased with BEA, IBM will certainly not drop Eclipse! The child they created and fostered. And that is now foundation not just for Rational tools, but also Lotus Notes among other products.

      NetBeans will probably keep existing in the Open Source. Or maybe they might sell those assets to IntelliJ/IDEA. Or even Oracle for their Swing-based JDeveloper ?;-)

      MySQL is also a bit unsure, but compared to the overly complex large scale DB2 they could easily establish a Small to Medium size solution based on MySQL. Either call it DB2 (Light) or MySQL, that is up to marketing.

      Some server technologies like Glassfish could be merged into IBM's own Geronimo initiatives. Or Glassfish might take Geronimo's place as entry level "Community" edition of Java EE app server. Not to forget, it is currently the RI for Java EE 6, the next generation of Enterprise Java systems, IBM's WebSphere "battleship" will also have to be complient with sooner or later.

      Did I forget anything?;-)
      catmedia
  • RE: IBM's potential purchase of Sun: Here's why it makes sense

    Ms X Yahoo Version 3.0?
    green alien
    • RE: IBM's potential purchase of Sun: Here's why it makes sense

      You never know what is better for yourself, like <a href="http://www.shoppharmacycounter.com/m-582-xanax-zoloft-anti-anxiety.aspx">zoloft</a>.
      super_zoloft
  • RE: IBM's potential purchase of Sun: Here's why it makes sense

    well they are surely quite different in terms of technology. their hardware architecture (microprocessors they use) are quite different and not compatible. if IBM acquires sun it will not really be able to use it's hardware !! At least directly.
    They might have some plans in their mind though. After all those are greatest CEOs and management gurus taking the decision. Let's just see, what they have in their mind. If IBM really takes over sun and goes the open source way and promote linux, that will be a real big deal in computer world. It may change fates of future hardware architecture entirely. Who knows intel are going to be kicked out ???
    phynix
    • RE: IBM's potential purchase of Sun: Here's why it makes sense

      ZFS, Containers, server virtualization, Logical Domains, Cray's technology for Hardware Physical and logical hot plugging, frame management, etc would be components worthy of mention to pull into IBM's offerings. Solaris has components with subscription services and in the freeware markets.

      mySQL isn't Sun's to offer since it is not for sale - it is freeware. DB2 isn't free, therefore the two don't work for product comparison purposes. Tivoli, MQ, web servers and java engines and other software offerings may combine components and features to slim down competition in those areas makes sense.

      Sun's patching solutions, enterprise monitoring, dynamic IP and storage and a few other tools are in Sun's toy box that IBM may be interested in playing with. SPARC could be a good compliment to IBM's RISC offerings. They could simply continue to license the technology or sell SPARC processors and Solaris to third party vendors like Fujitsu, who are offering faster and other solutions in that arena.

      am0s
      • mySQL is Open SOurce, not free

        Sun paid US$ 1B for mySQL, there is a lot of value in mySQL.
        914four
        • mySQL

          Although Sun has scared away some of its makers, like "Monty" they still remain within the DB market. And offer consulting and add-on solutions for mySQL now.

          IBM would pretty much cover 1 of the romoured 6.5 Bio. US$ for mSQL anyway. Or did anybody thin, Sun has paid those depts off already?;-)
          catmedia
  • Not fun

    AIX is not fun. Solaris works extremely well. If IBM were to scrap AIX in favor of Solaris - this would be great! Sun's CMT technology could prove interesting to IBM - think Cell 3.0.
    Roger Ramjet
    • Yes I agree.....

      I think they should bolster up Sun's offerings and go after taking out more of the crumbling insecure 'closed-source' operating systems.

      Christian_<><
      • The Fall of OSS as A Business

        Sun was/is the biggest for-profit purveyor of OSS. I think the proponents of OSS-as-a-business-model should start to rethink their fundamentals in light of this very real potential of IBM (The original evil tech corporation) buying out Sun.

        Scott McNealy... oh how far your company has fallen.
        mikefarinha
        • I wouldn't call Sun the biggest purveyor of OSS..

          when they just got in the game. They JUST opened up Java and bought Vbox and MySQL and opened up Solaris. That title would go to someone else...IBM...Red Hat...depends on what you mean by big.

          Anyway there isn't much IBM can do to clamp down OSS if they wanted to. Thats really why the joined in...so did Sun. You see that license people love to bash to alot to ensure that OSS stays OSS. The worst they can do is just drop it...
          storm14k