A big blue cloud overshadowed Sun’s announcement today unveiling their Open Cloud Computing platform. Media was a buzz today at rumors of a possible acquisition of Sun Microsystems by IBM. Still a rumor at this point, the story brings up many questions about how feasible this acquisition really is and if it makes sense from IBM’s perspective as well as Sun’s.
Here is Forrester’s take:
First and foremost this would be an acquisition based on market consolidation where a smaller vendor is acquired by a larger player, in an effort to grab a greater total share of a market where growing via margins is impossible. With Suns core business based in servers, a declining market, this seems a perfectly reasonable scenario to envision. The main value for IBM lies in the margin dollars found in the UNIX server market. IBM Global Services is one of Sun’s largest global resellers so it would be an opportunity for IBM to secure this very loyal customer base and increase its share of the UNIX market where all the margin dollars are found in the server market. Add in HP and Sun’s recent partnership around Solaris and you’ve got another big motivator for IBM to look closely at a potential acquisition of Sun to strengthen itself against the competition. Furthermore, IBM has wanted to get its hands on Java for some time as it is a key intellectual property for WebSphere and in terms of Identity & Access Management (IAM), IBM would also dominate the market from a revenue perspective with a Sun acquisition. Forrester believes a combined entity would compromise somewhere near 30% of a $2b+ IAM market. This isn’t the first time IBM has made attempts at acquiring Sun but so far all attempts have been unsuccessful. There also should be no antitrust concerns being speculated as IBM Rational alone has yearly revenue in range with Sun.
In terms of Sun, their growth strategy of appealing to developers through open source software — Solaris, MySQL, NetBeans, GlassFish — and hoping they will then turn to Sun for servers and storage won’t work in a global recession. The strategy depended on the rise of a new wave of Internet businesses — Web 2.0 — and expansion of Internet offerings of telcos and existing large service providers called “red shift companies”. In a global recession, neither camp is growing at the rate Sun needs it to. This makes a potential deal a possibility from Sun’s perspective.
Still, acquiring Sun would pose a number of integration issues for IBM Software Group. Firstly, IBM aims at executives while Sun aims at executives and beyond with a strong marketing investment towards developers. Secondly, both sides have fundamentally different business models. IBM SWG is not structurally set up to monetize support revenue stream model which they would acquire and very likely would have issues maintaining SLAs required to maintain it. Additionally, on the marketing front, a decentralized marketing model at IBM SWG would find challenges integrating a more centralized model targeted at grass roots like that of Sun. Although these challenges are not insurmountable they do offer a glimpse at several significant deterrents for IBM.
While IBM is the vendor which sparked the conversation, other vendors have made bids for Sun in the past and if IBM is interested it’s not out of the question to think others like Cisco and HP might counter. Regardless of the who, if Sun is acquired it should come as no surprise to see the winning bidder to shed a lot of the weaker products (and a significant number of redundant staff) in the process. From a software perspective we would expect Java, Solaris, MySQL, and Indentity Management Suite to live on with the new company with the possibility of GlassFish, NetBeans, Open ESB, and Java CAPS being spun off into open source projects if they are to continue on.
Given the current state of the market any acquisition rumor is food for thought and should be considered but this represents a deal that has just has many pros as it does cons and should be treated as such.
Thoughts on an IBM acquisition of Sun? Let us know what you think?
By James Staten
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