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posted on 28 August 2008 10:10

The markets have assimilated Sun's poor quarterly results, shrugged off the jam tomorrow statements and now values Sun at less than $7 billion again, as in mid-July. Is it an acquisition target?

Sun's shares are now trading at $8.86, a tad above the July 14th low point of $8.78. In the meantime they climbed to $10.86 on August 15th with a market capitalization some way above $8 billon but since then have fallen off a cliff with Sun's market cap' now $6.65 billion. Suppose potential buyers casts their eyes over Sun, what would be the main things they see?

If it were a vulture buyer looking to dismember and sell then the StorageTek products and people looks like a sellable business unit. But the rest of Sun is deeply infused with the Sun culture, the one that's consistently lost shareholder value and gone its own idiosyncratic way with SPARC technology, open source, adopting Intel, and going into data center switches. The Thumper line is a sellable product line but it's not clear who would want to buy the SPARC chip business - Fujitsu maybe - and, as for Solaris, who could possibly want that except as a customer base conversion target to another Unix or Linux? The open source software could be sold off perhaps to a startup or to Novell or Red Hat but you'd want these sales lined up before you jumped.

That's just not likely.

Suppose you looked at it from the point of view of Dell, HP or IBM or...there is no-one else who, as a systems company, would want to buy Sun. What they would see would be, from their point of view, a near runiously destructive Sun open source culture and business model. There is simply no way Michael Dell, Sam Palmisano and Mark Hurd would endorse Sun's business model.

From a Dell standpoint Sun is just not a Dell-type acquisition; that company buying great niche technology companies with terrific growth prospects like EqualLogic. Nope, no joy for Sun shareholders hopeful of an acquisition there.

HP and IBM would need to see certain mid-term and long-term value in whatever bits of Sun was left after they stripped out the poorly performing parts. IBM could take the open source stuff, like MySQL. It would have trouble taking the Open Solaris software stack on board and would surely regard the Solaris base as conversion material to AIX (less likely) or Linux (more likely). It might sell the open source part of Sun to Novell. The SPARC chip business would have to go, IBM already having PowerPC and not wanting another chip technology. Again Fujitsu is the obvious candidate.

The Constellation switches would go, IBM not being in the network hardware business. The StorageTek business could be lovingly combined with IBM's own tape activities. Sun services could go into IBM Global Services. Thumper could stay. Honeycomb would probably fade away. The Sun culture would be a big, big problem with thousands of people leaving.

HP would face similar problems. The Constellation kit could find a home in ProCurve. The open source SW would find no home in HP unless set up as a separate unit, and selling on a more likely option. The StorageTek line could be carefully and gleefully combined with the DAT and LTO lines giving HP a soup-to-nuts tape line. That would be a big plus. SPARC technology? Nope. Bye-bye to another buyer. Er, Fujitsu again. Staff cuts? Yes, in their thousands. All-in-all not likely with too much downside and too little upside.

Could Fujitsu buy Sun? Maybe but there would be an awful lot of new-to-Fujitsu product lines, like the open source software, that could see a shuddering halt in activity as culture shock stultified things with Japanese and Sun business styles colliding. Again disamemberment would be a likely outcome.

An acquisition would seem fraught with assimilation difficulties and Sun practically looks un-buyable. Sun's future has to be in Sun's own hands, and that means, for any big changes at the top, that Scott and Jonathan have to be replaced by shareholders on the board who eventually take a view that Sun's decline relative to the overall IT system's company sector performance is permanent and terminal.

Sun's shares were $25.32 on February 2nd of this year, producing a $19 billion market cap. They are now $8.86, 65 percent less. How low does the market cap have to sink before the board acts: $6 billion; $5 billion; $4 billion? Who knows? They are a very loyal bunch, even though their trouser pockets are shrinking before their and our eyes.

^{[Chris Mellor.]}