Shares of Sun Microsystems Inc (JAVA) tumbled as much as 25% in intra-day trading on Monday after media reports said that International Business Machines Corp.'s (IBM) talks to acquire the company collapsed.
Citing people familiar with the situation, reports said that the Santa Clara, California-based Sun's board rejected a formal acquisition offer by IBM on Saturday, sending a notice terminating Sun's deal to hold talks exclusively with IBM. In return, IBM on Sunday withdrew its offer to acquire Sun.
According to a report in The Wall Street Journal on Monday, Sun's board is split over whether to do the deal, with a faction led by Sun's chairman and co-founder, Scott McNealy, opposing the transaction and a group led by Chief Executive Jonathan Schwartz in favor. McNealy was chief executive of Sun for more than 20 years until Jonathan Schwartz was promoted to the top job in early 2006.
While the price of IBM's offer remained unclear, some people familiar with the talks say price wasn't the biggest issue, the Journal reported.
It is also said that there were no guarantees in the merger contract that IBM would close the deal if the companies encountered barriers or delays such as an antitrust review.
Sun shares had jumped more than 80% on March 18 after reports emerged that IBM was in exclusive talks to buy Sun and had proceeded to the due diligence stage, although neither Sun nor IBM has confirmed that they were in talks.
The deal was seen as a move to take Sun out of is miseries. Sun has never fully recovered from the dotcom bubble burst in the early 2000s, when demand for its servers cratered. Sun shares have fallen sharply over the past year, battered by the company's reliance on sales of high-end machines and customers in the financial sector, which experienced the economic slump earlier than other parts of the economy.
In November 2008, Sun Microsystems said it would cut 5,000 to 6,000 jobs, representing about 15% to 18% of its workforce worldwide, in order to cut costs to offset slumping sales of its high-end servers.
On the other hand, the acquisition of Sun would have helped strengthen IBM's position as the world's largest server maker. According to market research firm IDC, IBM was the top supplier of servers in the fourth quarter, with a market share of 36.3%. HP was second with a market share of 20%, followed by Dell with 10.6% and Sun with 9.3%.
Networking gears maker Cisco Systems Inc. (CSCO) last month announced a move into the server market, posing a threat to IBM, Hewlett-Packard Co. (HPQ), Dell Inc. (DELL) and Sun. If IBM was successful in buying Sun, it would have been in a better position to take on its new rival.
Acquiring Sun also would have helped IBM grow its most profitable software business. Sun's Solaris operating system, which competes with Linux programs and Microsoft's Windows, runs computers and data centers.
Additionally, the deal would have bolstered IBM's position against rival HP, which strengthened its services business by acquiring services giant Electronic Data Systems Inc. last year.
Sun Microsystems shares closed Monday's regular trading session at $6.56, down $1.93 or 22.73%.
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