IBM Withdraws Sun Microsystems Buyout
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In an announcement made earlier this week, IBM Corp's (IBM) withdrawal of
their $7B takeover offer of Sun Microsystems Inc. (JAVA) leaves the potential
buyout virtually dead. If IBM walks away, Sun Microsystems will have to look
for another suitor, which it had done for IBM, amidst JAVA's continual
financial troubles.
Over the past weekend, JAVA declined IBM's offer of $9.40 per share, which at
the time of offering, was nearly double the company's trading price last
month. One of the key reasons that Sun Microsystems rejected the proposal was
IBM's exclusive negotiating right, thus leading IBM to withdraw their offer.
Sun was looking for a commitment from IBM to
maintain their due diligence in pursuing the buyout, even if the company ran
into any financial or regulatory hurdles along the way. The previous
negotiations had the deal valued between $10 and $11 per share, with an
overall worth of Sun Microsystems of more than $7B.
By the close of Monday's trading session, shares of JAVA dropped nearly 23%,
falling $1.91 to $6.58 per share. Meanwhile, shares of IBM fared a little
better, slipping only 0.6%, or $0.66, to end the day at $101.56. Tuesday's
session saw much of the same from the previous trading session, as JAVA
slipped nearly 4% to $6.33, while IBM dropped nearly 3% as well to $98.75 per
share.
Although the deal is off for the most part, there still remains an outside
possibility that the two companies could end up together, despite the recent
withdrawal. Investors and shareholders in Sun
Microsystems may take it upon themselves to expedite the sale of the
company, as JAVA has been hemorrhaging billions of dollars since the dot-com
burst in 2001.
IBM showed interest in the company back in early March in an attempt to gain
more control over the development of Sun's Java programming language, which
is used primarily in the development of applications for web sites and mobile
phones. Another reason for the interest in the company is that IBM is looking
to acquire Sun's MySQL database software in order to compete more effectively
with Oracle Corp. (ORCL), the leader in database software.
The recent development between the two companies resemble something familiar
to the Microsoft (MSFT) and Yahoo! (YHOO) debacle that occurred last year.
Yahoo!, which at the time, rejected MSFT's $47.5B takeover, had shareholders
up in arms about the squandered opportunity, thus pushing then-CEO Jerry Yang
out of office. Yahoo, which is currently trading at $12.81 per share, is less
than half that of what Microsoft was offering at the time.
"Let's hope that Sun doesn't go down the same path as Yahoo. I hope this was
not a brinksmanship play by the company's board, because there really are so
few suitors for the company. A deal has to happen for Sun long term. I just
can't see them remaining independent," announced Rick Hanna, equity analyst
with Morningstar Inc.
"We don't think the final chapter of this conversation's been written," stated
Keith Wirtz, president and CIO of Fifth Third Asset Management. "If there's no
deal, all shareholders of Sun want to hear an articulation of why this company
will work independently. A lot of people own the stock and you may see some
noisy investors," Wirtz went on to add.
With the possible buyout of Sun Microsystems, the merging of the two companies
could fringe upon antitrust laws, since the two companies overlap in several
business models, including tape-based data storage. Combined, the two firms
would potentially own 52% of a $3.1B data storage market, and more than 65%
of a $17.2B high-end server computer market as well.
IBM feels that the company can greatly increase Sun's revenue potential in
that IBM has a broader service and software business. Over the past year, Sun
Microsystems posted huge sales totals of $13.3B, yet has not been able to
sustain a positive profit margin, which was evident last year with a net loss
of $1.9B. IBM, on the other hand, has fared much better during these difficult
financial times, posting a profit of $12.3B over the same period.
Since the start of the new year, shares of IBM, which is the largest server
manufacturer, have traded higher by 21%, while rivals HP (HPQ) has seen their
stock's price dip more than 6%, and Dell shares have slipped nearly 4%.
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