IBM reportedly in talks to buy Sun Microsystems

By MarketWatch

Last update: 7:34 a.m. EDT March 18, 2009

LONDON (MarketWatch) -- International Business Machines Corp. is in talks to buy Sun Microsystems for at least $6.5 billion in a deal that would put hardware back at the core of Big Blue's operations and bolster its computer-server business, The Wall Street Journal reported.

Should a transaction go through, it would be the largest purchase ever for Armonk, N.Y.-based IBM (:

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 92.86, +1.64, +1.8%) -- and would translate into a 100% premium over Sun's closing price of $4.97 a share on Tuesday. Sun's shares are down more than 70% over the past year.

The Journal, citing people familiar with the situation, said a deal could happen as early as this week but also stressed the talks could still fall apart. The report also said that Santa Clara, Calif.-based Sun Microsystems (:

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 4.97, +0.27, +5.7%) had shopped itself to other prospective buyers including Hewlett-Packard Co. (:

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 29.72, +0.70, +2.4%) , which declined to make an offer.

Sun shares rose 65% to $8.20 in pre-open trading. IBM shares fell 2% to $90.85.

By making a bid for Sun, IBM may be acknowledging the necessity of competing in hardware, despite promising slim profit margins, the report said. In the last few years, IBM has purchased a string of software companies and some services firms, but it sold off hardware operations such as personal computers.

At the moment, IBM gets more than half its revenue from services, and the bulk of its profit comes from services and software.

Acquiring Sun would put hardware back at the core of the company's operations and could prove helpful as it takes on old competitors such as Hewlett-Packard and new rivals such as Cisco Systems (:

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 16.13, +0.68, +4.4%) , which on Monday announced its much-anticipated foray into the server business.

There could be regulatory hurdles to a deal, however. Christine Varney, the Obama administration's next antitrust chief, has voiced support for a different approach to deals than that of the Bush administration, which was generally amenable to mergers.

If it were to buy Sun, IBM would boost its share of the servers market by roughly 11 percentage points, to more than 40%. Sun has a particularly strong position in the telecom and finance sectors, but its reliance on the U.S. market has been viewed as a burden.

The server market has been challenging of late, with the top five vendors -- including IBM, Hewlett-Packard and Sun -- all posting declines in their fourth-quarter server revenue, according to research from industry specialist IDC.