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Sun Shareholders and Jonathan Schwartz: Take the Money!

Posted by Bob Warfield on March 18, 2009

IBM reportedly has an offer on the table to purchase Sun for $6.5B.  As Techcrunch puts it, “That is two quarters of revenues for Sun.  If you factor in the $2.6 billion in cash and short term investments on Sun’s balance sheet, the true offer is closer to $4 billion.”  Sounds like a bargain for IBM, no? 

The market, OTOH, evidently thinks Sun is worth much less on its own because the IBM offer is almost double what Sun’s shares had been trading at.

Sun has had a difficult time for quite a while now.  They flew high during the dot com boom, but since have had trouble maintaining altitude.  A number of different commoditization forces have preyed on Sun’s dominance.  First, the multicore crisis and other events conspired to make Sun’s proprietary SPARC microprocessors not much faster (if indeed they’re faster at all) than Intel’s chips.  That eliminated most of their major proprietary advantage on the hardware side.  Meanwhile, on the software side, for a computer manufacturer, proprietary advantage comes from the OS.  Though Sun has tried mightily to make Solaris more popular, Linux keeps eroding its share of the Unix world and it’s hard to see how they stem that tide. 

Sun has not been without the wherewithal to try to create new franchises, for example in storage.  But it’s not enough.  Lately, we’re in the teeth of a major paradigm shift to Cloud Computing.  Sun is making a lot of noise about it, but they’re not really demonstrating much traction.  Sun, unfortunately, has been positioned as the high end solution.  The trouble is, Cloud Computing is all about massive clusters of commodity boxes.  Sun even had an early entry for the Cloud in the form of Sun Grid.  But it was so focused on supercomputing based on some pretty proprietary architecture, that it never went anywhere.  My last company, Callidus, used it to good effect for our SaaS offering, but we only managed it because we had lots of relationships with Sun Execs and because for a little while, Sun was willing to bend over backward to get someone onto the platform.  Alas, the winds shifted and another opportunity was lost.  I note Sun is promising they’re back, but its years later, and this business with IBM will bury that news in short order.

IBM represents a good home for Sun.  Lots of good can come of it for both companies as well as for customers.  For example, IBM and Microsoft have been trying mightily for many years to compete with Oracle in the database server market.  Sun brings MySQL to IBM where it will no doubt join forces with DB2.  If the company has its act together, I would expect them to insert DB2 guts in place of the current InnoDB engine and advance the performance envelope on the product to make it harder on Oracle.  Likely it also makes things harder for SQL Server too.   Being able to run MySQL and seamlessly upgrade to DB2 as a form of “vertical scaling” would make for a product offering that is priced everywhere on the demand curve–a powerful competitive weapon IBM has used in the past to good effect.  The world wants some counterbalance to Oracle, so this will go over well.

On another front, a combined IBM+Sun collection of IP and projects-already-in-motion just might field a competitive Cloud offering sooner rather than later.  Likewise, combining Sun’s high performance computing assets with IBM’s mainframe business will likely give HP and a few others fits at the high end hardware market.  As I mentioned, Sun is promising a new Cloud offering.  And the world could use some alternatives to Amazon too.

It’s important to note that IBM generally has a good culture.  It’s not like the horse is being sent to the glue factory.  The best people at Sun can continue to thrive in the new entity in all likelihood.  If any company knows how to reinvent and restart at a huge scale, it’s IBM.  They can heal Sun’s businesses if anyone can.

The other thing to note is that the Cloud paradigm shift is really an all out war for control over data centers.  Cloud computing will further centralize purchasing decision, overturn years of account control, and increase the focus on fewer transactions that have commodity pricing.  Early players like Amazon appear to be running away with a disproportionate share of the Cloud spoils.  Huge transactions are at stake, and if Amazon’s early momentum is any indicator, mistakes that cost market share made early in the war can be very costly later.  Meanwhile, even for those that don’t go Cloud, big companies that want to retain their own data centers will still want “Cloudy” technology in their datacenters.  And they will use the threat of Cloud adoption to drive their own negotiations with the vendors.  Effectively, whether you really go Cloud or not (meaning whether you truly outsource your datacenter to a company like Amazon), you’re still part of the Cloud movement.  From that standpoint, it’s a battle between HP, IBM, and Cisco, with Sun probably not being strong enough to go it alone as the fourth player.  Larry Dignan has some good notes on what the synergy between these two would look like.

Do the deal, guys.  There may not be another one as good.  Interestingly, they may actual be quite open to the deal.  Sam Diaz reports that Sun approached HP, but that HP was not interested.  Wouldn’t you love to know if Sun started all of these discussions, or whether they simply approached HP to get a competitive bid after IBM had approached them?   My money is on the latter, but you never know.

Who will be the next consolidation target?  EMC perhaps?

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