The Big Blue Sun?

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According to press reports making their way around mainstream news organizations as well as the blogosphere, IBM is making a play to acquire Sun Microsystems. The initial advantages appear to be straightforward. IBM rules in the East, old-school; Sun is a major player in the West (although their Silicon Valley neighbours, H-P, sell far more hardware, especially since the Compaq acquisition). IBM's strength is mostly in big, heavy, hardware, with proprietary systems around them, including mainframes and its distributed systems (which, for those of us who have worked with them, look and behave suspiciously like repackaged mainframes) and its huge consulting arm IBM Global Services (IGS). IBM has a robust software business, mainly focused around its database (DB2) and application server (WebSphere) as well as several other middleware pieces. Sun, on the other hand, tends to develop leading-edge, dynamic systems and software. It is the major force behind Java, the top enterprise-class development language, offers everything from low-cost "pizza-box" sized light hardware running AMD and Intel standard chips to its own high-end multi-processor multi-core Sparc-based systems.

The differences between the two can be summed up in their histories. Ten years ago, Sun said, "we put the dot in dot-com", while IBM could have been called, "we put the red tie on the blue suit". The history of how the Sun storage appliances came to be is particularly instructive. Several senior engineers went to a senior executive at Sun and said, "We invented NFS (the protocol used for most network attached storage devices, like those sold by NetApp), we have the best hardware, we are open across the board, why aren't we players?" The executive approved the program on the spot; two years later, the appliances were out on the market. This type of thing could never happen at IBM. Sure, it might get approval for preliminary market and sales research after several rounds of executive committee meetings, and the huge and influential sales organization might or might not approve, but Sun is innovative and on the edge; IBM is conservative and on its seat.

The old line is that "no one ever got fired for buying IBM". This is true, which is why big health-care organizations still buy lots of IBM. I recently worked with a large health system that insisted on buying IBM servers, despite a fully-loaded cost of purchase, deployment, maintenance and application conversion of twice the alternatives (Sun or Linux, both of which were explored and priced out), and a feature set that was about 30-35% less than their base requirements. On the other hand, small firms, start-ups, and even the financial behemoths of Wall Street (which, one might point out, essentially no longer exists), were never worried about a bureaucratic existence and "no one ever got fired". They were, and remain, far more interested in getting the job done as efficiently, reliably and cost-effectively as possible. IBM never competed in this space. I will say it again. IBM never could and never did compete in this space.

So what are the prospects of this proposed acquisition?

  1. It doesn't go through. Even if the IBM and Sun executives and Directors can come to terms, I would put it at 50/50 that shareholders will approve. On the other hand, Sun shareholders have tolerated directors and management that have left Sun's stock to bounce up and down like a yo-yo over a multiyear period. Sun is currently languishing at 1/6 the price of just two years ago.
  2. It goes through. If it does, expect IBM's famous bear hug to kill Sun. IBM has bought itself market share in many sectors before, squeezed the company, and killed the goose that lays the golden egg. Tivoli, Lotus, the list goes on. These were all great companies at one time. IBM bought them, integrated them to the "big blue" culture, and they remain withered on the vine. In the meantime, IBM has had somewhere around zero real innovation on its own all of these years. Yes, it has made major advances in its R&D labs, but has brought little to none of it to market. ZFS is the first major filesystem innovation in decades.

Either way, Sun shareholders are losers, and have been for several years. Scott McNealy was a colourful character, crazy in a positive way. To be fair, he did nearly kill the company when it got completely blindsided by the arrival of commodity hardware and Linux. However, Jon Schwartz, who managed to recover from that phrase - I attended his "Sun on Wall Street" presentations back in 2003 when he attempted to woo back many of his former bread and butter customers - has bungled it to this point.

Sun has an enormous amount of potential value locked into its franchise. IBM will not unlock it, it will crush it. On the other hand, if the deal does go through, expect many senior and talented Sun staffers to leave, if not immediately, then shortly after some next equity/options vesting milestone. Many of these will start new companies that will compete directly with what IBM (the company formerly known as Sun) does and was planning on doing. These companies will be more nimble, will succeed, and will eat IBMSun's lunch while the people left at IBMSun desperately beg the "boys in blue (suits)" to give them an answer to the small proposal to do the same thing... that has been in committee for 24 months.