Most of you know I worked at Sun for over 7 years in Corporate Development. Truly great years.
Since rumors emerged about an IBM acquisition of Sun, I have been getting a lot of questions about the deal; the synergies and benefits etc so thought I’d share my thoughts.
The original 100% premium over the stock price (pre-rumor price) is pretty lucrative and would provide a nice return for new shareholder including one Private Equity firm that injected a large sum earlier this year. There would still be, however, a large investor group that would remain underwater, including the likes of KKR. Nevertheless I’m sure management is taking the offer seriously.
Personally, I don’t think it’s a good deal for Sun shareholders. It doesn’t tap the full value of Sun - assets, lines of businesses, server and storage products, customer base, developer community (which btw is the second largest in the world) and position in the stack in the networking and telecom world (deeply integrated). Another issue is the fact that Sun has 1.5Bn to 2Bn in the bank, and whilst I’m sure this has been considered in the terms, it does mean that they are being bought partially with their own cash.
However, equipment vendors will continue to consolidate. Hardware and software are moving towards the Services model and the cloud is becoming the platform. Here is why I believe IBM is looking at Sun.
1. Improve margins
One less competitor in the market will obviously improve overall margins for those who remain. This deal would really leave just 2 key players - IBM and HP - and means that a couple of % points across the board will translate into some $300 million (on Sun business alone). This could be doubled if you include IBM’s hardware business.
2. Perception & Developer Communities
Cloud computing is pretty important going forward and HP has been aggressively marketing their presence in this space, particularly after the OpenCloud acquisition. Sun has always been about “the network is the computer” so it’s very probable that IBM’s marketing power will enhance their position in this space.
IBM has always focused on helping it’s customers with OpenSource software and Sun undoubtedly has strong presence, “process” and intellectual capital in this area. MySQL, found in virtually every new technology startup and many large enterprises, will alone deliver a huge new (for IBM) customer base which Sun valued at 1B. It will become a core element of the IBM Services division
Furthermore IBM is going to tap into Sun’s developer community and entice them to develop applications and services on the “cloud”. IBM will manage the developer community and, crucially, provide them with a path to money. Developers love this.
A combined Sun and IBM could easily reduce spending on R&D by 20%, and achieve significant economies of scale by consolidating office locations – which should add some 2B to the purchase price.
Additionally, Sun is famous for innovation and employs some of the best and brightest engineers in the business. IBM’s market presence, geographical reach and services operations will provide a good path to monetization for a lot of that innovation.
Sun also has an incredibly advanced corporate culture. They are genuinely Web 2.0 in their approach to Open, Sharing, Participating and Community engagement in their DNA. This is highly unusual in the corporate world.
4. Customer base
Sun has a large and extremely loyal customer base and is very deeply embedded in the software and networking stack. Again, this is very sticky with customers and a huge benefit for the Services side of the business.
In the “dot in the .com” days Sun was strong with start ups, and the last couple of years have again seen Sun win traction with start ups in the 2.0 era. As these companies grow (and they are growing at a velocity that other industries can’t keep pace with…..twitter, facebook, zappos, alibaba, QQ, Zhanzuo, freindfeed) they will stick with their original services architecture and the suppliers of those platforms. MySQL has tremendous presence and Sun hardware has been making great headway into these accounts.
Last but not least, the traditional telecommunication industry and service providers along with the telecommunication industry vendors are very loyal customers of Sun. This is another segment which will be critical to IBM if they are going to compete with HP.
My 2 cents…..