IBM is in talks to buy Sun Microsystems Inc, sources with knowledge of the matter said, a move that could bolster the technology giant against rivals in the high-end computer server and software markets.

International Business Machines Corp is offering to pay over $6.5 billion, between $10 and $11 a share, The Wall Street Journal reported in its online edition. That would be double Sun's Tuesday closing price of $4.97.

Shares of Sun jumped 81 percent to $9.01, while IBM shares fell 2 percent to $90.89 after the Journal reported that a deal was expected to be announced this week.

Such a deal would be IBM's largest-ever acquisition, and lead to the creation of a massive technology firm offering both computer hardware, software and services.

Analysts saw the move as part of a consolidation trend, as Hewlett-Packard Co, IBM and Cisco Systems Inc jostle for control of corporate data centers and compete to supply the high-end computers that power complex corporate transactions and networks.

They need to make sure that they have a suite of products, to be on the leading edge, so they have dominant share, said Zach Rosenstock, analyst at Wayne Hummer Wealth Management.

My feeling is that the good players with good technology and products will eventually get taken out by the bigger guys who have the means to do it and understand that it's easier to buy them than to mimic them through internal development.

Sun, which declined to comment, has long been cited as a takeover target for IBM, HP, Dell Inc or Cisco, which introduced a comprehensive set of data center products earlier this week.

IBM, which had nearly $13 billion in cash at the end of $2008, declined comment. Its largest acquisition to date is the $5 billion purchase of Canadian software maker Cognos in 2008.

IBM's move, as well as Cisco's announcement on Monday, could signal a new wave of partnerships and acquisitions in the data center market as companies strive to provide more comprehensive products and services to their customers.

Analysts have cited data equipment maker Brocade Communications Systems Inc, infrastructure software maker Citrix Systems Inc and niche network optimization companies, such as Blue Coat Systems Inc and Riverbed Technology Inc, as possible acquisition targets ahead.


Bankers have said Sun has been searching for a buyer in recent months. Sun has never fully recovered from the dotcom bubble burst in the early 2000s, when demand for its servers cratered.

Some analysts had said the challenge of valuing Sun's intertwined software, hardware and services businesses could put off potential buyers, but many said that even with the reported premium, it could be a good buy for IBM.

The market hasn't been kind to Sun Microsystems in the last 12 months. So it's not an expensive acquisition in my view, said Jyske Bank analyst Robert Jakobsen, speaking from Denmark.

Analysts said the move would bolster IBM's efforts to gain market share in data centers, seen as a key area of growth as companies grapple with growing Internet traffic and energy costs. It would certainly up the ante in its rivalry with HP.

IBM was the top supplier of servers in the fourth quarter, with a market share of 36.3 percent, according to market researcher IDC. HP has 29.0 percent, followed by Dell with 10.6 percent, Sun with 9.3 percent, and Fujitsu with 4.2 percent.

These five server vendors all posted declines in their fourth-quarter server revenue, hurt by pullbacks in corporate spending on technology due to the weak global economy. The Wall Street Journal said HP had declined to buy Sun, citing a person briefed on the matter. HP declined to comment.

Analysts also said IBM and Sun may be compatible as both had spent the past several years reinventing themselves by shifting their focus away from hardware to software and services.

Sun has been expanding production of Linux-based computers, although that endeavor has failed to revive its stock price and the company has been shedding up to 6,000 jobs, or 18 percent of its workforce.

Sun, whose name stands for Stanford University Network, rose to prominence in the 1990s when start-ups flocked to its high-end computers, which run on its Solaris operating system and have been widely used in the financial services industry.

When the Internet bubble burst in 2000-01, funding for start-ups dried up along with much of the demand for Sun's computers.

As of Dec 31, Sun had $1.63 bln in cash and $1.01 bln in short-term investments.

(Additional reporting by S. John Tilak, Ajay Kamalakaran and Sumeet Chatterjee in Bangalore, Jim Finkle in Boston; Writing by Tiffany Wu; Editing by Lisa Von Ahn and Derek Caney)