IBM, Sun said to break off takeover talks

IBM, Sun said to break off takeover talks

The negotiations reportedly stalled after IBM made an offer Sun considered too low.

NEW YORK (Reuters) -- IBM Corp. and computer and software company Sun Microsystems Inc. broke off acquisition talks after Sun rejected IBM's offer of $9.40 or below per share, a source with the knowledge of the matter said Sunday.

The collapse of the talks, if final, would come as a surprise to Wall Street, which had seen the deal as a means for Sun's survival, as well as a way for IBM to compete more effectively against rivals like Hewlett-Packard.

The source, who was not authorized to speak publicly about the matter, said it was unclear if talks would resume.

Kaufman Brothers analyst Shaw Wu said it was a mistake for Sun to reject the offer, citing the leap in Sun shares to $8.49 on Friday from $4.97 on March 17, a day before talks between the two technology companies were first reported.

"The acquisition is already factored into the market's thinking. To reject it over 50 cents a share, or whatever it may be, it doesn't seem like a very prudent move," Wu said.

An IBM spokesman declined to comment, while Sun officials were not immediately available for comment.

Sources told Reuters in March that IBM was in exclusive talks to buy Sun. One source had said on Saturday that IBM lowered its offer price for Sun to $9.50 a share from $9.55 a share and that a deal may be announced this week.

IBM shares have also been rising since the negotiations were first reported, helped by an upswing in the overall market, and most analysts had said the move -- while risky -- would likely help the company in the long run.

Buying Sun would hand IBM a clear lead at the high end of the $45 billion overall server market fought over with Hewlett-Packard.

It would also broaden IBM's software portfolio, add storage products that vie with EMC and Network Appliance, and provide an edge over Cisco Systems, which some see as its biggest rival in the long term.

Damaged goods
But the collapsed deal is expected to affect the smaller Sun more than IBM, which has fared relatively well despite the global economic downturn thanks to its outsourcing business and its shift from hardware to higher-margin software sales.

Sun posted an 11% decline in quarterly revenue for its fiscal quarter ended Dec. 28, while gross margins shrank to 41.9% from 48.5% from a year earlier.

The company rose to prominence in the 1990s but never fully recovered from the dot-com bubble burst earlier this decade, and analysts say it has failed to fully capitalize on its software assets including Solaris and Java.

"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?"

Failed negotiations with IBM could mean that Sun will need to look for another buyer, and contend with a lower offer.

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 still likely to strike a deal at around $9.40 a share and that IBM was still the most likely buyer.

"Like any acquisition candidate they are trying to force the highest bid possible," Ghriskey said. "IBM doesn't necessarily need these assets. But I think they could probably benefit from them at a reasonable price," he said.

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