June 30, 1999 6:15 AM PDT

An IBM, Sequent deal would drive Monterey

Rumors of a possible merger with IBM drove Sequent's stock price up by 25 percent yesterday, but technology analysts aren't convinced a deal is sensible or imminent.

Instead, what might be more likely is a manufacturing agreement in which Big Blue sells IBM-branded Sequent systems.

The market opened in a buzz yesterday after a Wall Street Journal story reported that the two companies were close to a deal. Sequent, which specializes in servers that can accommodate many more Intel processors than machines from most other server makers, closed at 17 9/16 on Nasdaq, up 3 9/16. Sequent also works with IBM on the "Monterey" operating system being readied for the forthcoming Merced processor.

"It doesn't make a lot of sense that IBM would want to buy bricks and mortars right now," said Tony Iams, senior analyst with D.H. Brown Associates. "So from an acquisition standpoint of buying the company, that doesn't sound too rational. But from a technology standpoint it seems quite rational for IBM to want to undergo some kind of deal to distribute Sequent systems."

IBM increasingly has been shifting technology from its mainframe and Unix server business down into its Intel-based Netfinity server line. Big Blue led the worldwide server market in the first quarter with more than $3 billion in revenue, followed by Compaq, Hewlett-Packard, and Sun Microsystems, according to International Data Corporation.

But IBM has a hole in its product line between four-processor Netfinity servers and higher-end Unix servers, such as the RS/6000, analysts say. Sequent's NUMA (Non-Uniform Memory Access) NT server technology, which scales up to 256 processors, would fill that niche nicely.

That hole, however, may not big enough to warrant a Sequent purchase, some analysts said.

Sequent is minuscule compared to IBM, just 2 to 3 percent of its size, noted Jim Williamson, research manager at IDC. "I can see a few reasons why they might be interested in a business like Sequent's, but I can think of better takeover candidates."

Other technology analysts shared Williamson's and Iams's view, but all also pointed to one area where a merger or partnership would make sense: Project Monterey. The cooperative effort between IBM, Intel, SCO, and Sequent is producing a version of Unix for both IA-32 and IA-64 platforms. The operating system draws from IBM's AIX, UnixWare from SCO, and Sequent's PTX version of Unix.

A tighter relationship between IBM and Sequent could help push Monterey forward more quickly, analysts said, with a potentially big payoff. "There is a belief it may be the highest shipping volume Unix on IA-64," said Jim Garden, analyst with Technology Business Research. "Monterey can pull on the base of SCO, which is huge, and AIX and Sequent, which are respectable."

A merger would make more sense for Sequent, said Merrill Lynch's Steve Milunovich. Sequent is not projected to see new growth until the release of Intel's 64-bit Merced chips sometime next year, he said.

Sequent also faces a server world with increasing pricing pressure, according to IDC. The market researcher found that increases in unit sales between the first quarters of 1998 and 1999 did not lead to revenue gains.

Larger companies can bundle solutions with servers and recoup lower hardware margins. "Sequent doesn't have that opportunity," said Williamson. "There's not that much more they can sell you than the boxes. As the boxes get cheaper, they get hurt."

Spokespeople for both IBM and Sequent declined to comment on the merger reports. If there is a merger, and not just a technology partnership, it may mean little difference to investors at Sequent.

"We'd be surprised if a deal were closed at a significant premium to the current price of $14--perhaps at $15 to $17 per share," Milunovich stated in a research report today. "Sequent has traded as high as $30 back in 1997 but recently has been in the $8 to $14 range."

 

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