04.06.09
IBM’s Got Better Things to do with $7 Billion
We had a hard time imagining exactly why Sun was worth $7 billion to IBM, and upon completing the due diligence, evidently so did IBM. Yet in spite of a slightly reduced offer that, according to the New York Times, went form $9.55 a share to $9.40, we wonder what was going through the minds of Sun’s board, which according to the Wall Street Journal, was split: Jonathan Schwartz’s faction supposedly in favor and, not surprisingly, Scott McNealy’s against. Evidently, even in retirement, McNealy still calls the shots.
Looking back, McNealy seemed more interested in being right than adapting to structural changes in the marketplace that made Sun’s posturing irrelevant. As Sun was wasting its energy fighting rather than accommodating Microsoft with Java, IBM did an end-around with Eclipse which shifted the center of the Java universe away from the JCP. Meanwhile, emergence of Linux eroded the very foundations of Sun’s business.
We’ve had a hard time figuring what other exit strategy remains for Sun’s beleaguered shareholders. Yes, Sun just hedged its bets signing a Solaris x86 distribution deal with HP for its Proliant servers at the end of February, but for all practical purposes, there’s nobody that matches Fujitsu’s footprint as Solaris OEM. As we’ve argued previously, Fujitsu would be the most logical resting place for Sun’s SPARC server business, and there’s some precedent for Fujitsu to make such investments as it recently bought Siemens out of its x86 Fujitsu Siemens joint venture. Besides, as the largest Solaris OEM, they have real skin in the game for its survival.
Sun’s problems are hardly new. While open source has become the mantra under Jonathan Schwartz’s watch, we have a hard time figuring how it’s going to drive a $5 billion business built on lower volume, high margin sales. Some have drank the Kool Aid; Silicon Valley entrepreneur Sramana Mitra argued that Sun should fully walk Schwartz’s open source talk. OK, Sun’s Open Storage CMT (Niagara) and x86 systems businesses have grown of late at double digit rates, but for Sun to make the transition, it would have to become the open source counterpart of Dell.
But we’d agree with Mitra, had Sun made the move when Schwartz took the helm back in 2006. With the economy much better then, and the market expecting Schwartz to make a real break with the past, think of how Sun could have reinvented itself had Schwartz, as one of his first moves, divested the SPARC business. Were Fujitsu interested, it could have received a few billion which could have been used for a real makeover to a high volume but lower margin business; maybe some (or most of it) could have been used to shut Wall Street up and take the company private. Just imagine.
IBM’s $7 billion was simply a play to surround HP with more market share; but with aggressive selling, it could seriously eat into Sun’s business without the buyout –- servers are replaced far more readily than software. It has better things to do with its money.
Dana Blankenhorn had the best take on Sun’s fickleness, equating them to the Dodgers Manny Ramirez, who walked away from a $5 million offer, only to take it several months later after nothing else surfaced.