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The hard part about playing chicken is knowing when to flinch. Sun Microsystems shares fell 24 per cent on Monday after buy-out talks with IBM hit a snag over the weekend. That they did not fall further is a sign that investors hope the struggling computer hardware maker may yet agree to a takeover.
If the deal is dead, it is difficult to see a way forward for Jonathan Schwartz, who has failed to revive Sun’s sagging fortunes since he took over from Scott McNealy as chief executive in 2006. But if the companies are involved instead in brinkmanship over terms, Sun’s board should not press its luck.
Sun’s hardware and software portfolio would give IBM a useful cudgel to wield against its arch-rival, Hewlett-Packard, in corporate computing systems. But neither business is essential to IBM’s strategy of focusing on higher-margin IT services and software. Add in potential antitrust issues and Sun is, at best, in the “nice to have” column for IBM. It is certainly not a “need to have” business, even at the most recent $7bn offer price.
Sun’s situation is more urgent. Endless restructurings have failed to make up for its failure to capitalise on the shift towards lower-cost, standardised IT systems that followed the dotcom bust. Its prospects as a standalone company are dwindling. If IBM walks, finding another suitor will be difficult. HP, Sun’s next most logical acquirer, is still digesting its recent $13.9bn acquisition of Electronic Data Systems. Anyway, under Mark Hurd, HP’s acquisitions have been focused on software and services, not hardware.
Brinkmanship can backfire spectacularly if your opponent has less to lose from walking away. Yahoo learnt that the hard way last year after it held out for better terms from Microsoft. Sun’s board should take note: Microsoft had a lot more riding on the Yahoo deal than IBM has riding on Sun.
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