Report : Sun/IBM merger bid rejected, IBM walks away

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Shareholders will be watching Sun and IBM shares very carefully now when the markets open tomorrow (in the US), as merger talks between the two companies have been called off; according to sources talking to both the Wall Street Journal and the New York Times.

A merger between Sun and IBM would given them a total combined share in the computer server market of 42 percent, overshadowing rivals HP’s 29.5 percent and Dell’s 11.6 percent. Both companies also rival in productivity suites; however, OpenOffice (Sun’s offering in the market) is free and available to download for Windows, Mac or Linux.

According to the Wall Street Journal report, people familiar with the deal has said that Sun’s board have rejected a formal acquisition bid by Big Blue (IBM) on Saturday; and on Sunday, IBM withdrew their offer – but another source has told them that advisers to both companies remain in touch.

The board was split between two factions: one against the merger led by chairman and co-founder Scott McNealy, and one for the merger led by chief executive Jonathan Schwartz. However, while the merger talks were speculated to be over pricing, which was rumoured to be around $9.10 and $9.40 a share, that was not the biggest issue.

A New York Times report has said that the breakdown in talks was over the conditions over the deal; with IBM scrutinised the “change of control” contracts for executives, senior engineers and managers, feeling that payments to senior employees would be higher and extended to more people to the company than it expected. Sun, however, were more concern over securing tighter provisions that would prevent IBM to walk away from the deal.

Had Sun gone to IBM, IBM would now own the open source database MySQL, open source operating system Solaris, and the Java technology used on many websites. The breakdown in talks will now allow Sun to look for other suitors, including HP and Cisco Systems, which recently entered the server market.

However, if the deal did go ahead, they would have faced several anti-trust suits from the US Justice Department and the European Union because of their competing products – especially in the tape-based storage systems market, as it would give 100% of the market to the merged company.