The Sun Sets

A friend of mine asked me what I thought of the talks between Sun and IBM. At first I was trying to ignore it. The timing of it, coming on the heels of the Cisco announcement and a bunch of Sun talk on cloud computing, seemed suspicious.

But as I wrote my email, I realized that I did have a bunch of opinions on this and, what the heck, might was well put them here for everyone to see.

Before going into all of my deep thoughts, it's full disclosure time. I have Sun stock. Big deal, so do a lot of people who do lousy in the market. That was mean but fair. I have always been a proponent of Sun technology, despite feeling that Solaris is mostly irrelevant to all but a few folks who just don't know when to let go (like Sun).

I see several scenarios for the Sun-IBM merger deal.

Scenario 1. It might not happen at all so don't get too excited. A lot of folks think that IBM might overpay for Sun and I can see it getting killed by somewhat frugal shareholders. It's hard to value technology companies since the intellectual property often far outweighs earnings. You can see that being the case with Sun. Besides, they are only in “talks”. More can happen to kill the deal then can happen to help it to close. Who knows what what the result will be when CEO egos bump into each other.

Scenario 2. Also known as the doomsday scenario where Sun turns into a brown dwarf and burns out. Sun needs this more than IBM. They have great technology but they can't seem to sell it. It is really sad to see where they are financially, especially of you are a shareholder like myself. Sun has to do something while there is still something left that has value. Worst case scenario, Sun runs out of money, market share, and ideas. Then, everyone loses. What's truly awful is the nagging suspicion that they have already run out of ideas and the money and market share will follow soon. The doomsday scenario is unlikely but not impossible. Luckily, they have a few bright lights in their constellation and many loyal followers and customers.

The related scenarios are not much better. One that is more likely then the doomsday is the slow death. Sun continues to spiral slowly downward until they cease to be relevant. Over time they sell off or shut down unit after unit. Storage first (the perennial underachiever of the data storage industry), then networking, and finally servers until only the software and services is left. These assets get sold off piecemeal to at fire sale prices.

Scenario 3. IBM does the deal. Sun has technology that is important to IBM, especially Java and Solaris. For instance, much of IBM's own software products rely heavily on Java and, to some extent, MySQL including Eclipse and Domino . A lot of that IBM software runs on Solaris machines. If someone else were to buy up Sun at a fire sale, say Microsoft, it could be devastating to IBM. They need to protect Sun so that they aren't beholden to someone who is less cooperative.

I think that the deal will happen because of this. Sun can't risk either going under or the slow death of a thousand cuts. It's in Sun's best interest to sell off the entire company and let IBM worry about the product overlap. IBM can pick up a few good people and customers, which is a bonus. I don't know how much they will want to value the non-software parts of the business. It might come down to getting hardware and services for essentially nothing while paying a high price for the software business.

Scenario 4. An alternate scenario has Sun breaking up the company, with the hardware and services group trying to make a go of it while IBM buys the software component. Services would include cloud computing and the “data center in a cargo container” business as well as the traditional support business. All of these service offerings have merit and could make it as a standalone business. IBM doesn't need them and gets very little value from them. I doubt that will happen since Sun already knows it can't make it in hardware and the services business would be saddled with all of that also ran hardware.

Maybe sell software, close hardware, and create a services company? That might work but it would be pretty complicated to decouple all of that.

The more I think about it, the more I think the deal makes sense for both of them. IBM has to protect itself, can use some of Sun's products and services, and will keep a good number of mutual customers happy. Sun needs to do a deal so they don't end up in the tech company equivalent of an unmarked grave.

Unless finicky shareholders or squabbling CEO's mess this up, Sun will be consumed by IBM and cease to exist. Too bad, so sad.