IBM's talks to acquire its computer rival Sun Microsystems for $7 billion have broken down.
IBM withdrew its offer after Sun terminated IBM's status as its exclusive negotiating partner, according to reports.
The collapse of negotiations is likely to hurt Sun's shares as a purchase was regarded as a positive move for the once-feted Silicon Valley company. A deal would also have helped IBM compete more effectively against rivals such as Hewlett-Packard.
Sun was said to be unhappy with IBM's offer of $9.40 per share or below. It was unclear today if talks would resume.
When the news of the deal came out two weeks ago, shares in Sun Microsystems almost doubled to nearly $9. The deal would have been likely to prompt an antitrust challenge in the US because a combined IBM and Sun would have a 42 per cent share of the computer server market.
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.
IBM, meanwhile, was concerned about the size of payments that would be received by senior Sun executives and engineers under Sun's "change of control" agreements, according to The New York Times. Such agreements are intended to compensate employees if they lose their jobs when a company is acquired.
After initially discussing a price of between $10 and $11 a share, IBM had lowered its bid to $9.55 and then reduced it further over the weekend to $9.40, according to The Times. Sun then notified IBM that it was terminating exclusive negotiations, and IBM withdrew its its offer.
"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?"
Sun shares had risen to $8.49 on Friday, from $4.97 on March 17, the day before talks between the two technology companies were first reported.
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. The takeover, if it eventually goes ahead, would be the largest acquisition in the history of IBM.
Sun posted an 11 per cent decline in quarterly revenue for its quarter ended December 28, while gross margins shrank to 41.9 per cent from 48.5 per cent from a year earlier. It is said to have been seeking a buyer for several months.
The Journal reported that Sun's board was split over the prospective sale, with a faction led by Scott McNealy, Sun's chairman and co-founder, opposing the deal and a group led by Jonathan Schwartz, the chief executive, in favour.
Other potential buyers could include Hewlett-Packard or Cisco, which may be looking to expand their product lines to compete with IBM.
Fujitsu and Dell have also been mentioned as hardware companies that might want to acquire Sun.
Sun rose to prominence selling high quality computer servers in the 1990s but never fully recovered from the dot-com bubble burst earlier this decade. Analysts also say it has failed to capitalise fully on its software assets including Solaris and Java.
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 likely to strike a deal at around $9.40 a share and that IBM remains the most likely buyer.
"Like any acquisition candidate, they are trying to force the highest bid possible," Mr 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 server market fought over with Hewlett-Packard.
Analysts have said Sun's software could also help IBM compete with Microsoft as well as Cisco Systems, which some see as IBM's biggest rival in the long term. Both Cisco and IBM have been expanding beyond their traditional products to new technologies such as "cloud computing," in which companies store data and computing power in remote data centres accessed over the internet, rather than buy their own computer equipment.
Credit: http://business.timesonline.co.uk
URL: http://business.timesonline.co.uk/tol/business/industry_sectors/technology/article6042955.ece
Correspondent: Mike Harvey, Technology Correspondent, San Francisco
