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3/18/2009
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IBM-Sun Deal Would Create Business Software Monolith

Official sources won't rule out reports of a pending $6.5 billion deal, while observers say acquisition would make sense.

An IBM spokesman on Wednesday dismissed as rumor published reports that Big Blue is in merger talks with Sun Microsystems, but didn't deny the speculation outright.

"All I can tell you is that we don't comment on rumors," said the spokesman. Sun officials weren't immediately available for comment.

Wall Street apparently believes the reports of a possible $6.5 billion deal, published in The Wall Street Journal and New York Times, to be credible, as investors pushed Sun's long-battered stock up 81.09% to $9 in early trading. IBM shares were off 2.98%, to $90.14, on concerns that an acquisition of Sun would dint profits in the short term.

Some analysts believe a deal would make sense for both companies. Sun's proprietary hardware business has all but dried up in the face of competition from commodity players such as Intel, and it's struggling to keep pace with larger players in the software business, such as Oracle, Microsoft, and IBM itself.

Yet the company retains key, widely used assets, including the Solaris operating system, the open source MySQL database -- which boasts more than 11 million installations --and the Java programming language. "Java would factor hugely in IBM's interest in Sun," said Allan Krans, an analyst at research firm Technology Business Research.

Krans also believes that IBM could do a good job monetizing Sun's open source products. "It's an opportunity for IBM to take these assets and broaden the market for them and drive a better financial return," said Krans.

IBM doesn't charge for open source software directly, instead bundling it with lucrative services and consulting engagements. The business model represents a threat to pure-play software vendors like Microsoft and Oracle. Adding Sun to the mix would serve to extend IBM's dominance in the market for middleware that businesses use to connect a vast range of computing devices.

Indeed, an acquisition of Sun would give IBM such a marked lead in certain segments of the business software industry that such a move would be sure to generate an antitrust review by the Justice Department.

IBM is well positioned to take advantage of low market valuations for Sun and other industry players. The company's profits and revenue have held up better than most of its competitors during the recession, largely because of long-term services engagements that generate a steady stream of predictable revenue.

IBM's net income jumped 12% in the most recent fourth quarter, to $4.43 billion.


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