Business Tech

Shares of Sun Microsystems suffered a staggering jolt Monday, following reports that the hardware maker rejected IBM's formal bid over the weekend and Big Blue has withdrawn its offer.

Sun's stock plummeted nearly 23 percent to $6.68 a share in premarket trading, following reports in The New York Times and The Wall Street Journal that the company rejected a formal buyout bid of $9.40 a share or less, and terminated an exclusive negotiating agreement, prompting IBM to withdraw its offer.

Sun's shares closed at $8.49 a share during the regular trading session on Friday.

(Credit: Yahoo Finance)

The storage and server maker's stock, while significantly down, has not yet touched the $4.97 a share level it was trading at before reports of the merger talks first surfaced in mid-March.

Sun is expected to face further shareholder pressure, in light of the reported breakdown in talks, Toni Sacconaghi, an analyst with Sanford C. Bernstein, stated in a research report Monday morning.

Sacconaghi noted that Sun's shares averaged $4.47 a share in the three months prior to reports of the merger talks, meaning that IBM's offer of $9.40 a share was a 110 percent premium.

He further stated:

Given the size of the premium and the fact that Sun's board has presided over a decline in the company's stock price over the last eight years from over $250/share to less than $5 prior to the acquisition talks being leaked, we believe that (Sun) is likely to face significant shareholder unrest, similar to what occurred when Yahoo declined Microsoft's offer. We expect Sun to issue a public statement detailing its rationale.

In the Yahoo-Microsoft merger talks last year, Yahoo, which had been trading in the high teens before the offer, rejected Microsoft's $33 a share buyout offer. That brought the wrath of one of Yahoo's large investors, Carl Icahn, who launched a proxy fight to attempt to unseat Yahoo's board of directors with his own slate. The two parties eventually reached a settlement, with Icahn and two of his representatives receiving seats on Yahoo's board.

Potential backlash from failed Sun-IBM negotiations could distract Sun's management and board by forcing them to justify their rejection rather than focusing on their struggling business, Sacconaghi noted.

The emergence of IBM-Sun buyout talks during the last two week of March, the end of Sun's fiscal third quarter, could end up affecting Sun's earnings because up to 40 percent of Sun's revenue is generated in the last two weeks of a quarter, Sacconaghi stated.

He also noted that customers are likely to have lingering concerns about Sun's future. And the prospects of Sun finding another buyer do not look bright, Sacconaghi said, adding these comments about the company, which trades under the stock ticker "JAVA":

While press reports suggest that the fall-out in discussions may be attributable to brinkmanship, we do think that a collapse in the talks has considerably weakened Sun's hand, as we see no other likely suitors, and a considerably higher potential for weakened (fiscal year third quarter) results.

According to press reports and our contacts, JAVA approached most logical buyers several months ago, with IBM being the most interested. While we believe that HP makes the most sense given its cost focus, physical proximity to JAVA (leading to more facile facilities consolidation), and more complementary product lines (HP is not as strong as IBM in Unix), the company appears fully focused on its acquisition of EDS, and a coincident deal to acquire Sun may prove to be overly distracting. JAVA's higher end server product portfolio would be very complementary to Dell, but we believe that an acquisition would be too pricey and represent too hearty an integration challenge for Dell.

While Sun's shares tanked on reports that merger talks with IBM have broken down, shares of IBM were down just 1.88 percent to $100.30 a share in premarket trading Monday.

Updated at 7:13 p.m. PDT, with comment from Sun Microsystems and market share information for both companies.

Sun Microsystems rejected IBM's formal buyout offer on Saturday, calling the bid insufficient and putting future deal talks at risk, according to a report Sunday in The Wall Street Journal.

IBM reportedly made a formal bid of $9.40 a share, or less, for Sun, which in turn rejected the offer and terminated Big Blue's right to exclusive merger talks, the Journal reported. IBM, in turn, withdrew its buyout offer.

In addition to holding a belief that the bid was too low, Sun apparently was also concerned that the terms of the offer provided IBM with too much flexibility in being able to walk away from the deal, the Journal reported.

Prior to reports that the companies were in merger talks, Sun Microsystems had closed at $4.97 a share and had been trading below $5 a share for a number of months.

Whether Sun would entertain resuming merger talks if IBM sweetened the deal was not clear, the Journal noted.

A Sun Microsystems spokeswoman noted the company does not comment on rumors or speculation. IBM representatives did not return calls seeking comment.

Sun's reported concerns over structuring a deal that would allow IBM to easily walk away from a merger agreement should not be taken likely, say antitrust attorneys and industry analysts.

"It's obvious this deal will get a second request (for more information) from regulators. And once it does, it'll take six months, at a minimum, to a year before a decision is reached," said one attorney who specializes in antitrust matters. "Sun can be twisting in the wind for a year."

A second request for information signals to the parties antitrust regulators are formally investigating the transaction to decide whether to challenge it in court.

IBM holds nearly 32 percent of the worldwide server market, based on 2008 factory revenues, and Sun 10.1 percent, according to IDC. Combined, the two companies would account for nearly 42.1 percent of the overall $53.3 billion server market.

And within the high-end Unix server market, IBM held a 37.2 percent slice of the market last year and Sun 28.1 percent, representing a combined 65.3 percent should a merger go through, according to IDC. Unix servers, while on the decline, still accounted for the majority of high-end, non-x86 server systems, last year, according to IDC.

And if bets were made on whether antitrust regulators would allow IBM and Sun to merge, the antitrust attorney said he would "bet against it."

On the storage front, in which the industry generated $27.7 billion in revenues last year, IBM ranked third with 16.2 percent of the market, while Sun ranked a distant No.5 with 6.1 percent of the market, according to IDC. A combination of the companies could push IBM to the No. 1 spot in storage, surpassing Hewlett Packard with its 19.6 percent market share.

When it comes to storage technology using tape drives, which amounted to $987 million in revenues for the first three quarters last year, IBM held 66.6 percent of the market and Sun a 33.4 percent share slice, according to IDC. Combined, the two companies would hold 100 percent of the tape market.

Disagreements over setting the price of a break-up fee, a penalty the suitor or target company would have to pay to undo a merger agreement, are not new and have been known to occasionally derail merger talks, the attorney noted.

After weeks of negotiations, IBM reportedly is eyeing a $9.55-per-share buyout for Sun Microsystems, according to a report in The Wall Street Journal.

Such a price would value the deal at roughly $7 billion and offer Sun investors nearly double the price of the stock before reports surfaced earlier this month that the parties are in buyout talks.

A report in The New York Times, meanwhile, notes the parties are discussing a purchase price of $9.50 a share.

In either case, Sun's investors haven't seen the hardware maker's stock trade at those levels since August. Last spring, Sun was trading at a 52-week high of $16.37 a share.

Sun (blue line) has consistently underperformed the Dow Jones (red) and Nasdaq (green) over the past 52 weeks.

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The Journal notes that while the deal talks have progressed toward their final stages, there is no guarantee the deal will ultimately go through.

Sun reportedly is asking IBM to assure the company that it will vigorously pursue the merger despite any regulatory scrutiny, in exchange for Sun agreeing to a lower buyout price than the parties initially discussed.

Sun was up 1.34 percent to $8.32 a share in early morning trading, despite the broader markets edging downward.

IBM has reportedly cut its purchase price for Sun Microsystems to a range of $9 to $10 a share. And Sun is apparently willing to accept the lower range providing IBM agrees to pursue the deal, even in the face of antitrust scrutiny, according to a report Thursday in The Wall Street Journal.

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Previously, IBM was contemplating a buyout price of $10 to $11 a share, according to the Journal. Big Blue had recently been delving into Sun Microsystems' contracts for any possible conflicts, as part of its due diligence on the company.

Sun Microsystems stock spiked 6.25 percent to $8.50 a share on initial reports Thursday that IBM lowered its price and Sun was willing to accept it, but then Sun's shares tempered as more news filtered out that the deal was still under discussions and there was no guarantee it will ultimately go through.

Sun subsequently was up a mere 1.63 percent to $8.13 a share in intra-day trading Thursday.

Prior to reports last month that IBM was interested in buying Sun for approximately $6.5 billion, Sun Microsystems' shares had largely languished below $5 a share for the past five months.

Shares of Sun Microsystems took a hit in Monday morning trading, falling at least 7 percent while the broader markets advance.

Sun fell as low as $7.53 a share, following reports Friday in The Wall Street Journal that IBM is currently engaged in combing through Sun's contracts, as part of the evaluation process on whether to move forward with an acquisition.

Sun's shares started sinking shortly after a big jump on word of a possible acquisition by IBM.

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Sun's shares had been on a rocket ride, after reports surfaced last week in the Journal that IBM was in negotiations to acquire the company for roughly $6.5 billion.

After the reports surfaced, Sun's shares shot up 79 percent to $8.89 a share. The struggling hardware maker's shares had largely languished below $5 a share for the past five months.

As it reportedly shows IBM its contracts, Sun is approaching the end of its fiscal third quarter, which could provide Big Blue with additional data for its decision making.

IBM is reportedly wading through Sun Microsystems' contracts and documents for potential conflicts or problems, as it works its way through the due diligence process toward a merger, according to a report Friday in The Wall Street Journal.

IBM's attorneys have been poring over Sun's documents for at least the past several days, if not longer, according to the Journal.

And while the due diligence process is not anticipated to lead to any nixing of a deal, IBM is seeking a clear understanding of where Sun stands with its complex cross-licensing agreements and other contracts, according to sources cited by the Journal.

In addition to Sun's contracts, IBM may also be taking a peek at Sun's fiscal third-quarter data, given the company will be closing its quarterly financial books at the end of the month.

When Sun reported its fiscal second-quarter results in January, it posted an 11 percent year-over-year drop in revenue. But on a sequential basis, its financial performance was less severe.

As the parties work toward a merger, IBM is reportedly considering a buyout price of $6.5 billion to $8 billion, according to the Journal.

Sun closed down about 6 percent to $8.10 a share during regular trading Friday. But in after-market trading, its shares rose nearly 2 percent to $8.24 a share.

Sun Microsystems shares soared Wednesday, as reports surfaced that the struggling hardware maker was in merger talks with IBM.

Sun ended the day up 78.9 percent to close at $8.89 a share. The last time Sun traded at such levels was back in September.

(Credit: Yahoo Finance)

Although Sun's stock got a jolt as reports circulated that the workstation and storage company was in merger talks with IBM, it did not return it to its 52-week high levels of $16.72 a share.

Some analysts issued support for such a deal.

Jeff Goldberg, a senior analyst with financial research and consulting firm Celent, said in a statement:

The rumors that IBM is making a bid for Sun Microsystems might be causing waves, but after the storm, the market will find that the two companies align well in mission and technology.

Both Sun and IBM have a strong focus on creating industry standard platforms, with heavy investment in open source initiatives. Few companies of this size would be trusted to control such a large portion of the open source space, including Sun's recent acquisition of the open source database MySQL, though IBM has established the ability to maintain the interests of the open source community separately from their businesses.

IBM fell 1.03 percent to end the day at $91.95 a share, while the broader markets advanced.