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The Real Story Behind The Setting Sun And IBM

It's no secret that talks between Sun Microsystemsand IBM have collapsed; and it's no secret, based on my earlier reporting that Sun has re-approached IBM and that IBM has rebuffed the overture. Again. But what's the real reason behind IBM's decision to walk?

I have heard from a number of sources that deep and intense regulatory scrutiny from both US and European regulators has been the root of the problem. But there is something else. A source tells me that IBM , as a big, big company that has done billions of dollars in mergers and acquisitions over the years, knows its way around the regulatory process, and that while there might be an issue with a deal for Sun , it's certainly not a deal breaker. This source characterized federal scrutiny as a reasonable regulatory issue.

The deeper issue is something IBM discovered during the due diligence process: A series of unusually structured contracts that Sun has with many key partners. Further, there's a "change of control provision" in many key executive contracts that Sun apparently was unwilling to unravel, and that was one of the reasons why IBM walked. I'm told this isn't a "golden parachute" or "poison pill," but simply a provision that forces the buyer to shell out tens of millions of dollars to a small group of Sun executives if the company is acquired. When IBM said it would have to lower the price of its offer to accommodate for that provision, Sun said no.

Sources tell me that Scott McNealy has a strong desire to return to day-to-day control of the company he once ran, that he has visions of becoming a Michael Dellor Steve Jobs; that current CEO Jonathan Schwartz was told to go out and find the best deal he could, and that by not sealing anything, his job is now at serious risk since McNealy still enjoys the broad support of the board. (That same board, incidentally, replaced McNealy with Schwartz three years ago. Boards can be fickle, I suppose.)

Meantime, what does all this mean for deal potential? This source tells me, don't bother sitting by the phone. With the likelihood that McNealy might come back to run the show, the scenario gets less and less palatable for IBM unless these contracts get restructured, and Sun is willing to sell at $9.40 a share, which I'm told is the price IBM is willing to pay. Neither seems likely, at least today.

Wondering what Yahoo's Jerry Yang is up to and if he wants to schedule a round of golf with McNealy to discuss.

Questions? Comments? TechCheck@cnbc.com