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By Don Miller
When IBM Corp. (IBM) launched a takeover bid for Sun Microsystems Inc. (JAVA) last week, it was widely seen as a move to put a stranglehold on the computer-server market. But IBM may be after a bonus prize as it pursues Sun – the chance to enter, and perhaps dominate, the rapidly emerging social networking software market.
By acquiring Sun, IBM could kill two birds with one stone – growing the hardware business by wresting control of the server market, and simultaneously expanding IBM's software portfolio, its most profitable business.
IBM initiated talks to buy Santa Clara, Calif.-based Sun, the fourth-largest computer-server maker last week, offering to pay about $10 per share, or $6.5 billion, a hefty 100% premium from Sun's closing price last Tuesday.
An IBM merger with Sun would create a clear leader in computer servers leaving IBM with 43% of global server sales, widening its lead over Hewlett-Packard Co.'s (HPQ) 30%, and Dell Inc.'s (DELL) 11%, according to fourth-quarter estimates from Credit Suisse Group AG (ADR:CS), Bloomberg News reported.
Servers, computers that run networks and web sites, account for almost half of Sun's total sales. Last quarter, global server sales fell 14%, the most since the aftermath of the dot-com bust.
"Size helps in this business — scale helps and IBM could use more of it," equity analyst Tom Smith told Bloomberg. "H-P, at least by total company revenue, now is distinctly larger than IBM. That's not how I remember it as a child."
But some analysts now see IBM's quest for Sun as a possible entry vehicle into the next wave of the computing revolution, especially in emerging "virtualization" and "cloud" computing technologies.
Explosive growth in Internet traffic on the back of online video use and social networking sites like Facebook, MySpace, and YouTube, has increased demand for technology that helps save space and hardware.
Cloud computing and virtualization, the hi-tech industry's latest buzzwords, are systems that allow consumers, developers and businesses to use the Internet to access programs and data at remote computer centers.
Sun's Solaris operating system, which competes with Microsoft Corp.'s (MSFT) Windows, runs computers and data centers. Sun's Java programming language would give IBM an edge in nascent open source technologies that enable users to easily access applications over the Internet.
Software and services has been a focus-point for New York-based IBM for some time, helping the company maintain healthy margins and solid growth even as a weak economy has dragged down hardware sales.
IBM is probably also aiming at Sun's MySQL software platform, an open-source database that runs Web sites that Sun purchased in early 2008. Open-source software allows users to access and modify source codes.
While Sun has failed to turn profits from its software portfolio, IBM may be betting that it can do a better job monetizing Sun's software, and use it to bring competitive heat on large technology rivals like Cisco Systems Inc. (CSCO).
"They have more resources, more manpower, more expertise in more areas of the computing business all around. So they may be able to fit more pieces of the puzzle and come out with a better solution than Sun had," S&P Equity's Smith told Reuters.
The combination would also give IBM "huge" cost savings," Ralph Whitworth, founder of San Diego-based Relational Investors LLC., Sun's third-largest outside shareholder, told Bloomberg. "It's an elegant solution to some very complex problems."
Sun has already begun trimming staff, and a combination with IBM would no doubt lead to further consolidation.
Sun recently disclosed plans to eliminate 583 workers in California next week, according to a filing with the state. Sun has said it could cut up to 6,000 workers as it copes with slumping sales.
"Sun's done a rotten job of running Sun," Rob Cihra an analyst at Caris & Co., told Bloomberg. "It has a cost structure that is just begging to be cut."
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