Where does the Sun-IBM deal failure leave Sun?

Where does the Sun-IBM deal failure leave Sun?

Summary: So Sun Microsystems turned down IBM’s offer of acquisition - even though Big Blue’s $7 billion buy-out bid was twice the valuation of the troubled Silicon Valley stalwart.We read on Bloomberg that the sticking point was a clause in the contracts of top Sun execs.

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TOPICS: Networking
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So Sun Microsystems turned down IBM’s offer of acquisition - even though Big Blue’s $7 billion buy-out bid was twice the valuation of the troubled Silicon Valley stalwart.

We read on Bloomberg that the sticking point was a clause in the contracts of top Sun execs. The news service reports that: “chief executive officer Jonathan Schwartz and chairman Scott McNealy have contracts that mean they would receive three times their annual pay, including salary and bonus, should Sun be acquired.”

IBM reportedly didn't think too much of that stipulation and would not honour it -- even though its acquisition of the fourth-placed server vendor would have boosted its position against number one vendor HP.

We also read that “Sun’s board contended IBM wanted too much control over Sun’s projects and employees before the deal closed”, which is hardly surprising: coughing up $7 billion has a way of concentrating the mind.

And especially when it appears that some super-rich employees wanted to grow even richer than they already are. Top Sun execs get paid in millions of dollars: Bloomberg reports that Schwartz’s salary was $1 million last year and his target bonus was twice that amount. And company founder McNealy was awarded $6.45 million in compensation last year, including $1 million in cash for his “service as an employee of Sun”.

But in this day and age, exactly how much money does one already super-rich individual truly need?

There's another factor. Even before the recession, Sun consistently failed to show a profit so IBM would be bonkers not to want to manage Sun closely. And Sun looks to be heading for its biggest loss since 2003.

Following its rejection of IBM, Sun’s share price dipped 23 percent, its biggest fall since 2002, according to Bloomberg.

So what are we to learn from this? Chatter among techies in the industry demonstrates tremendous loyalty to Sun and its technology. However, a company selling semi-proprietary kit -- yes, I know that Solaris is now open, and that it uses Intel processors and so on, but that’s not where the bulk of its sales are -- was always going to struggle now that hardware is commoditised and standardised.

Analysts agree.

“Sun can survive as an independent company, but the longer the recession goes on, the more likely it is the value of the franchise begins to fade,” said one.

“Sun made a horrible mistake. Wall Street analysts probably optimistically expect their revenue to decrease year-over-year for the next several years -- they should have just taken that money and ran,” said another.

Is this the beginning of the end for Sun? Industry observers -- including this one -- have called this before and been wrong. Largely down to the company's huge cash cache, Sun has continued to trade even as its accounts bleed red.

What's different this time is that Sun's top execs seem to have forgotten that we're in the middle of a recession. It might be because Silicon Valley has its own mental micro-climate. I was there a couple of months back, talking to venture capitalists and heads of startups looking for funding, and the untrammelled optimism was palpable: I almost started sweeping it up off the floor.

But in the real world, there's near-universal anger and disappointment at the shenanigans of the stupendously well-paid at the heads of companies. Keen to be seen as corporately and financially responsible, IBM is likely to have been sensitive to the appearance of funding what looks like plain greed.

Neither of the two parties has commented on their falling out. But if Sun is to survive, you'd have to hope that hubris doesn't get in the way of deals with any future suitors.

If there are any.

Topic: Networking

Manek Dubash

About Manek Dubash

Editor, journalist, analyst, presenter and blogger.


As well as blogging and writing news & features here on ZDNet, I work as a cloud analyst with STL Partners, and write for a number of other news and feature sites.


I also provide research and analysis services, video and audio production, white papers, event photography, voiceovers, event moderation, you name it...


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An IT journalist for 25+ years, I worked for Ziff-Davis UK for almost 10 years on PC Magazine, reaching editor-in-chief. Before that, I worked for a number of other business & technology publications and was published in national and international titles.

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4 comments
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  • Where does the Sun-IBM deal failure leave Sun?

    Before we assume the IBM bid represents good value, we need to determine what a reasonable market cap for SUN, assuming its senior management is replaced by a group of more competent managers which can actually execute against their strategy. The story of SUN over the last 4+ years is very much a story of poor management. I firmly believe SUN's products, staff and even strategy is correct, the only failure is senior management execution. So assuming a change at the top what could SUN reasonable achieve.
    SUN revenue break down is approximately the following, Hardware = $6b, Services = $3.5b and Software = $0.5b. Its margin $ is just short of $6b. Its current expenses is $2b R&D and $4b the rest, which is why its not making a profit. In FY09 this profit with be further impact by the remainder of the MySQL buy-out and the restructuring costs, so assuming all these costs are written off in FY09 we are left with a clean FY10. The restructuring will save about $0.7b per year so we should expect a profit of $0.7b in FY10, with a turnover of $10b. Assuming we need to target a PE of 20 (this assumes a 5% return on money per year, which is reasonable in the current economic climate) the share price should be $18.80. At this price the IBM bid look very poor.
    What makes it even worst is there are additional savings possible, at least for the short term. SUN's R&D bill is $2b, which is a very high for its size. There is no reason why SUN could not cut this down to $1.5b or even $1.0b for a few years to get the profits up above $1b per year, pushing the share price even higher.
    Finally, assuming the senior management executes on the existing strategy of ramping x86 server revenue and software revenue, we would expect additional profits. Both these initiatives have failed because they were poorly executed. SUN need to create a stand alone software LOB with its own P&L and have it organised like a viable multi-vendors software company. Even if this failed, it would remove the high cost of the existing loss-making software division. The same applies to the x86 business, SUN needs to develop a stand-alone x86 business with a low-cost sales channel. If it failed it would at least remove the costs associated with the existing loss-making x86 business. However I personally feel as stand alone organisations both would succeed, generating even more value.
    The problem is the existing senior management is unable to run a business or perhaps more focused on their own personal remuneration than actually helping the company to be successful. This article confirms this and if correct the bid fell through not because of any concern for the shareholders, staff or customers, but because of the lack of cash senior management would get. A sad story indeed.
    smycroft
  • Where does the Sun-IBM deal failure leave Sun?

    Apple needs to buy Sun plain and simple. It makes sense and it's not messy like an IBM/Sun buyout. Antitrust issues won't be a problem with Apple and Sun. Apple can then restructure Sun where necessary and give them a roadmap. Think of Sun as Apple Enterprise supporting Apple's creative market by merging Sun's engineering with Apple's interface design genius making corporate IT friendly.
    z3r0-87414
  • Where does the Sun-IBM deal failure leave Sun?

    Apple or Cisco should consider buying Sun as their businesses complement each others. Sun's middle management to leadership team should be replaced by Apple or Cisco's competent teams (whoever is acquiring). This will enable Sun's technologies to survive and resulting in cool products increasing the market share of that company successfully.
    saabbaas9
  • Where does the Sun-IBM deal failure leave Sun?

    That makes a lot more sense than IBM buying it. It would save Big Blue a lot of management hassle and time making thousands redundant -- and the cultures of Sun and Apple are probably a better fit too.
    Manek Dubash