IBM Acquiring Sun – The Really Big Question
It seems that IBM is in talks to acquire Sun Microsystems for $6.5B in cash. It’s difficult to see that this could be good news for customers, because IBM will surely kill many key Sun projects. On the other hand, if someone doesn’t buy Sun, it’s not on track to continue as it is now. That is, in the absence of an acquisition, maintaining the status quo isn’t an option because the company would have to make further job cuts to return to profitability.
Assuming the deal goes through, there would be a major review of the combined company’s key products, software, technologies and services. The aim of the review would be to decide which of these to keep, and which to kill.
Here are some what you might call “detail” questions that Sun customers will want to know the answers to:
- There’s a lot of BS thrown around on this topic, but the truth is that Sun is much more committed to making software freely available to developers than is IBM. Will IBM kill the Sun strategy here?
- There are many Sun products and technologies that compete with offerings from IBM. Will IBM kill these or cripple these; or will IBM contemplate killing IBM products while keeping Sun ones? For example, what would IBM do with software products and technologies like: Solaris; Netbeans; Glassfish; MySQL
- There are many aspects of the Java platform that don’t compete with IBM offerings directly; but are these of any interest to IBM? For example, is IBM interested in JavaFX? Or does the company actually believe that SWT is the way forward?
For customers, the problems with the above are that: such decisions are often not made rationally in M&A integration processes; and, in large organizations such as this, customer views and needs will simply not be taken into account. Rather, at the top, the process will be designed such that the outcome is pre-defined to be “the answer they first thought of”; and all the detailed decisions will be taken by people with personal agendas, who are focused on keeping their jobs and building their careers in the new, combined organization. What’s good for the customer won’t even be on anyone’s radar.
The Really Big Question
All of the above is detail, though. There’s a much bigger question that needs to be answered. It’s this. For IBM, would it be worth $6.5B to make the whole of Sun essentially “go away”? I haven’t done the arithmetic to figure out the answer, but I suspect that it’s very possibly the case that IBM could be interested in buying Sun, simply to shut it down.
Don’t look to IBM to answer that one directly, by the way. CEOs of public companies almost always lie to their shareholders about the real reasons for M&A, particularly when it’s a big acquisition. Because of the consequences of doing that, they almost always lie to everyone inside the company too, spinning them the same story that they spin shareholders. So, we’ll only find out the answer after the acquisition has gone through.
No matter what the answer, though, in event of IBM buying Sun, I’d expect massive consolidation with many great Sun offerings being canned. I’d also expect the prices of Sun offerings that survive to increase. As I said at the start of this blog, it’s difficult to see how this is good news for customers. The problem is that the alternative – of IBM not buying Sun – might not be good news for customers either…
Mr X wrote:
Can’t see them buying to shutdown – at least not totally – I’m not sure what percentage of Sun staff are R&D and what are sales etc. IBM definitely need Java – rest wouldn’t really know – IBM need to compete at the commodity end better – Sun have started to do that.
I know some customers of IBM services who would like IBM to support Solaris – they do but they discourage by pricing – constantly pushing toward AIX – which doesn’t have much traction in my particular industry – whether this would change will be an interesting one.
It’s possible that IBM are starting to see that grass roots resurgence of interest in Sun’s products – through use of MySQL, Glassfish, Java, Netbeans, OpenSolaris etc that Jonathan has talked about – or maybe is just a good time to get assets on the cheap – at other times might not even be allowed to do such a purchase due to monopoly worries.
I note Jonathan recent blogs have been talking about how to value Sun – perhaps he is trying to get the best price….
He may believe in the strategy but doesn’t believe the runway is long enough. Bottom line is the bottom has fallen out of the computer market at a time of transition for Sun.
One interesting question would be whether IBM keeps the Sun brand – obviously IBM has a very strong brand but it play’s in a certain way to certain markets – maintaining the Sun Brand might allow IBM to extend the customer base.
Posted 18 Mar 2009 at 2:22 pm ¶
simon wrote:
I don’t think the problem is that Sun’s assets *shouldn’t* be of interest to IBM. They should.
However, this isn’t a merger, it’s an acquisition. IBM folks will be in the driving seat during integration. Sun folks will have zero say. There’s every reason to believe that IBM folks won’t do the right thing; middle management turkeys rarely, if ever, vote for Christmas.
So, wherever Sun strategy is different to IBM’s, I’d mostly expect them to dismiss Sun, and try to proceed with the original IBM strategy.
So..
If Solaris is gaining traction in the market; that doesn’t mean some middle management dross at IBM won’t say, “We’ll transition them from Solaris to AIX or Linux. That’s what customers really want.”
If Netbeans is a better IDE than Eclipse, that doesn’t mean they won’t say, “We’ll transition them to Eclipse. No worries.”
If MySQL blows away DB2 in the market, they can still think, “DB2 is a better database than MySQL. This is a great chance to get MySQL users to change to DB2″.
If Sun’s new cloud strategy looks promising, IBM can say, “Customers don’t want that. What they want is to buy AIX boxes from us.”
The bottom line is- there there is a huge amount of duplication between Sun and IBM. I’m betting that most IBM folk would prefer to keep the “IBM solution” as opposed to taking on board a “Sun solution”. I really doubt this move will work out well for Sun customers. Time will tell. Happy to be proved wrong.
If, though, the future of the Java platform looks like: “Eclipse + Java SWT + WebSphere + DB2″, then we will likely be dropping Java… That’s a second-rate technology stack IMHO.
It would be a pity. “Netbeans + Java Swing/Java FX + JAX-RS/Glassfish + MySQL” is a pretty damn interesting technology stack; and only getting better. The brand new RESTful cloud APIs look really promising for building virtual data centers too.
Posted 18 Mar 2009 at 3:06 pm ¶
Mr X wrote:
Overall I’d agree – I’d much prefer to see an independent Sun. But I’m not sure the picture you paint of a cohesive IBM is correct – Remember IBM divisions have a history of independent operation – the PC division could have just shipped OS/2 rather than Windows – but it was in the interests of the PC division to sell Windows much to the annoyance of the OS/2 part.
ie The people making the choices as to whether to offer MySQL as part of there offering are not the same people as develop DB2. As I understand it ( and I could easily be wrong here – not being that much of a student of IBM’s corporate structure ) there isn’t a middle management that cut’s across the divisions.
So for example in the case of IBM services pushing IBM stuff – it’s probably more to do with the economics for them than a overall strategy – ie the hardware division gives IBM Services special prices, but IBM services charge the customer at market price – result – a bigger margin on the hardware for the services division and over time a lower service cost if they can keep the diversity down.
Probably a similar case for database etc.
Now for products which are free or close to free, the only issue for the services division is support – but if it’s what the customers are demanding they will go for it.
Obviously there is a separate question of whether IBM funds the development of multiple products in the same space – and I’d expect there would be some discussions on that at a higher level and obviously you would expect an IBM bias – however, with open source products – you can’t kill them just by buying their chief sponsor – I’d imagine that if they closed down internal mysql development that it would continue elsewhere – so that would be wasted money if the sole aim was to kill – if they are simply not interested and don’t mind the competition then fine – but there must be some value in being the lead developer of MySQL in terms of being the go-to company for services around that.
One of the interesting products that IBM has been very much involved with recently is
Open Office – I’d expect that to continue.
Obviously some projects might not have the community support to survive outside IBM support.
I’m not sure IBM killing everything would look too good politically or economically – why spend 6 billion then and get special dispensation from the government over anti-trust if your not going to keep on some assets or jobs?
They’d have to do it over time.
Sparc might be dead as a result but I expect some of the chip IP that Sun hold to be valuable to IBM.
In the Java space generally – one solution could be to create a Java foundation – along the lines of Eclipse foundation or the Open Office one?- with IBM as the key funder – that developed the specs, did reference implementations etc.
Posted 18 Mar 2009 at 4:43 pm ¶
softwarevisualization wrote:
This is M and A mania ala RJR Nabisco and AOL/ Times Warner. This is going to destroy Sun’s legacy and cost IBM big time.
The only reason IBM would buy Sun is to acquire rights to Sun’s patents and then wield them despotically in a way Sun never did. The long story there is this will accelerate the movement to simply ban software patents the way business method patents were all but disposed of by the Supreme Court recently.
What does Sun have that IBM wants? This is not about a smaller company being bought for their technology. It’s about a larger company buying a weakened rival in order to kill off it’s competitor. This is HP and Compaq / Carly Fiorina II.
Sun could continue as it is. It has the cash. It has the vision. The future of computing / cloud based applications, PaaS SaaS is on its side. If anything, they’ve been too far ahead of their times.
If IBM buys Sun you can bet that developers will desert Java en mass since IBM has their “own” VM just they way they have their “own” GUI toolkit for Java. IN the software arena, IBM has the worst case of NIH ever seen. Their developers are convinced they can do everything “better”, with marginal results and more importantly, the creation of discontinuities in technology development and adoption. IBM broke the Java the GUI community into two camps for NO good effect when it introduced SWT. So also with Eclipse, which is a poor imitation of IntelliJ and NB. The cultural differences between IBM and Sun’s developers are where the rubber will meet the road on this M and A. Developers aren’t so many thinking cogs that you can shuffle around from company to company, like other “assets”. They’re people with a POV and an attitude about what they do. That is, to the extent they’re any good at what they do. To the victor, IBM< will not go the spoils.
Here’s a dose of reality to all my friends on Wall Street and in management at both companies. Beneath the level of anything any analyst can see or quantify, there’s little tiny social and psychological micro-events that determine how the knowledge that’s in the heads and practices of Sun’s employees – which is what gives Sun its real value – gets “transferred” (or not) to IBM. So you bought the company. So what. trust me, you didn’t buy the developers. Quite the opposite. IF you think you can walk into any part of Sun’s IP, excepting the patents, and take ownership of it, you and Wall Street have a big surprise coming. It’s not under your control, and it never was and it never will be. The culture clash between the Sun way of doing things, egalitarian, optimistic, inventive, forward looking and social is going to slam head on into IBM’s well documented culture of manipulation, mean spirited employee relations, exploitative relationships with its customers (billable hours), aggressive and opportunistic use of the broken IP system (Phelps), divisive, conceited and rank-abusing management hierarchy, forced rankings among employees where the bottom 10% are automatically fired, etc. etc.
Prediction- the best of Sun’s employee’s flee to Google and Adobe, the rest foot drag and passively resist their new-found hell, IBM destroys zfs, Netbeans and other middleware products, Swing and finally Java itself through a combination ineptitude , alienation of key developers, grandiosity and conceit and when it’s all over a huge amount of really good stuff simply no longer exists, the market is poorer and the forward momentum of software development is set back by 15 years.
Posted 18 Mar 2009 at 5:09 pm ¶
simon wrote:
@Mr X
OK. Just done the arithmetic. If the reported price is correct, when you account for Sun’s cash and debt, IBM would be acquiring Sun for a little more than one quarter’s profit.
At this price, it’s a no-brainer deal for IBM – one quarter’s profit to take out a “top five” competitor and stop anyone else getting their hands on it (e.g. Dell). So, it makes perfect sense for IBM, even if all it does is effectively shut Sun down, and try to transition Sun’s customer base to IBM offerings.
As you’ve pointed out above, IBM is already well-practiced at doing that – it’s a core part of their Global Services outsourcing strategy i.e. get rid of all non-IBM technology during the first term of the relationship, so customers have to renew the deal. It’s all about lock-in…
From IBM’s point of view, then, I suspect even the most value-destroying scenario would be a win. If it succeeds in getting more value from Sun’s assets – IP, products, technology etc, that’s upside.
Posted 18 Mar 2009 at 9:22 pm ¶
Mr X wrote:
Yes it’s cheap – though closing everything down isn’t cost free – also you can’t maintain the revenue and eliminate all costs – depends on what Sun’s cost of sales is, what’s wasted, and what’s in productive R&D.
Also one thing to think about is the budget year – for a lot of companies, operating on a calender year, almost gone is the first quarter of the first year where budgets were set in the new economic climate. ie in many large companies spending last quarter was decided in late 2007! So there may have been a very large correction between last quarter and this – ie past performance is not a prediction of future performance in these times – particular for Sun – who’s main profits come from capital projects from the larger companies.
Another option would be a private equity breakup – not sure how much of that is around at the moment – but I’d imagine if done right you could sell parts off and collect the revenues for more than you bought it.
I still think a foundation supporting some of the core software technology is possible – they lead services – services needs freely available software to supply [1] at ideally a free price – you can either do this via internal development ( to ensure freely available at, available at economic cost ) or via external shared development with people who share your business model.
Look at all the companies that compete in browsers yet collaborate on webkit, have different offerings based on Open Office – IBM, Novell and Sun or the number of companies offering to host MySQL ( every ISP? )
In the past IBM has tended to use Apache foundation quite a lot – harmony, tuscany, derby, as well as Eclipse foundation.
[1] Imagine hosted email – and you built your offering around Exchange, then MS decided that hosting was what they wanted to do as well as the balance had really shifted from software sales to SAS – they could have a version of exchange with new features that you could only get via the MS hosted solution – that’s bad for competitors …. same goes for Oracle, or SAP etc.
ie while you use other peoples software in your service offering that vendor has the opportunity to take that business back.
Posted 19 Mar 2009 at 10:13 am ¶
simon wrote:
Closing something down can cost money if you want to fire all the people. But terminating projects/products/technology doesn’t have to cost anything ‘cos you can redeploy resources.
Having said that, of course, there would be huge numbers of job losses in combining IBM and Sun. So you’re right – the total cost of the transaction would include additional costs for rationalization.
I think a potential problem for IBM is that taking out Sun might not benefit them that much. Why? Because IBM isn’t that great at execution. Speaking personally, I’ve never met a really happy IBM customer; and I’ve never met anyone who has been impressed by their interactions with IBM Global Services.
There’s a also a reason IBM is essentially nowhere when it comes to the Internet. Its business model is based on an old-fashioned view of the data center and how enterprise software is developed and deployed. That model is on its way out – new, emerging companies don’t see any need to let their IT suppliers take as much of their money as IBM wants. Today, there are many more technology choices than there were ten years ago; so IBM has lots of work to do if expects new companies to pick IBM.
For that reason, I think that Microsoft, Adobe, Red Hat, Dell and HP could all benefit from this transaction.
Posted 20 Mar 2009 at 5:14 pm ¶