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Long gone are the days when reports of a tie-up between Big Blue and Sun Microsystems would send the entire market soaring and CNBC buzzing. By its December low, Sun was trading a whisker above the net cash on its balance sheet, its market capitalisation having shrivelled 99 per cent from its peak a little over eight years earlier. Even at the reported $6.5bn price, a 100 per cent premium to the previous day’s close, Sun’s enterprise value is under 3 per cent of IBM’s market capitalisation.
But if the financial impact of the deal is marginal, the strategic implications for IBM and its competitors in the server market are not. A deal would be significant enough for Hewlett-Packard, with a 30 per cent share, to cry foul on market power grounds and find a sympathetic hearing in Washington. If IBM can placate critics with non-strategic disposals then it will be in luck as the large installed base of Sun’s Solaris software users can open lucrative cross-selling opportunities. It has been obvious for quite a while that Sun on its own was not nearly large enough to extract maximum value from its popular open source software. IBM is a different story and any criticism that buying Sun is moving away from its strategic shift toward services ignores obvious synergies.
If the strategic rationale disappoints, or if buttoned-down IBM fails to mesh with Sun’s West Coast culture, the downside is limited. Even at the reported premium, analysts at Barclays Capital estimate it will take only $400m in synergies for the deal to be accretive to earnings within a year. As for Sun’s shareholders, their only decision is whether to take the money and run or wait for something better. Muddling along makes no sense as Sun has little scope to recover from the strategic missteps made years ago. One way or another, the sun is setting on a former industry powerhouse.
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