IBM Withdraws $7 Billion Offer for Sun Microsystems

After weeks of negotiations, IBM withdrew its $7 billion bid for Sun Microsystems on Sunday, one day after Sun’s board balked at a reduced offer, according to three people close to the talks.

Sun Microsystems's headquarters in Santa Clara, California.
Paul Sakuma
Sun Microsystems's headquarters in Santa Clara, California.

The deal’s collapse raises questions about Sun’s next step, since the IBM offer was far above the value of the Silicon Valley company’s shares when news of the IBM offer first surfaced last month. Sun, an innovative pioneer in computer workstations and Internet-era software, has struggled in the marketplace in recent years.

Sun Microsystems' shares fell by nearly 23 percent in Frankfurt Monday, while IBM was trading down 0.6 percent. In pre-market trading in the US, Sun Microsystems fell by 24 percent and IBM by 0.4 percent.

IBM had a team of more than 100 lawyers conducting due-diligence research on potential issues in a purchase of Sun, ranging from antitrust concerns to Sun’s contracts with employees and IBM competitors.

After the legal review, IBM shaved its offer Saturday from $9.55 a share, the offer on the table late last week, to $9.40 a share, said one person familiar with the talks. The offer was presented to Sun’s board on Saturday, and it balked. The Sun board did not reject the offer outright, but wanted certain guarantees that the IBM side considered “onerous,” according to that person.

Sun said it would no longer abide by its exclusive negotiating agreement with IBM, a second person familiar with the discussions said. On Sunday, IBM board decided to withdraw the offer.

The breakdown in the talks, said the second person close to the negotiations, came over the shifting balance of price and conditions for the deal.

For example, IBM scrutinized the "change of control" contracts with Sun executives, senior engineers and managers. IBM felt that the payments to senior employees were higher and extended more broadly across the company than it had anticipated. IBM pointed to the change of control contracts as one reason it was reducing its offer price.

Sun was most concerned about provisions that would restrict IBM’s ability to walk away from the deal.

“There’s lots of testosterone going back and forth,” said a third person familiar with the discussions.

All three sources would speak only on condition of anonymity because details of the merger talks are confidential.

Since last year, Sun executives had been meeting with potential buyers. IBM stepped up, seeing an opportunity to add to its large software business, acquire valuable researchers and consolidate the market for larger, so-called server computers that corporations use in their data centers.

In their talks, IBM and Sun had a contract to deal with each other exclusively. Now Sun is free to pursue other suitors, including IBM rivals like Hewlett-Packard and Cisco Systems. Cisco recently entered the market for server computers.

The breakup of the deal talks, analysts say, is a blow to Sun’s prospects. “For IBM, given its size, this was never a transformational deal,” said A.M. Sacconaghi, an analyst for Sanford C. Bernstein. “But in Sun’s case, it’s an extremely material event.”

“This leaves Sun in a tough situation,” Mr. Sacconaghi added. “Sun was on a path to selling itself, and this will inevitably raise questions in customers’ minds, no matter what Sun says, about its commitment to a go-it-alone strategy.”

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Whether the IBM decision amounts to a negotiating tactic to get agreement on some final sticking points is unclear. Though the offer is off the table for now, the two sides could resume bargaining if Sun’s share price drops and it comes under pressure from investors. On Friday, Sun shares closed at $8.49.

-- contributed to this story