Potential Fallout from an IBM and Sun Deal

Today’s Wall Street Journal story about acquisition talks between IBM and Sun may be surprising because of its suddenness. But on another, this is just another of the shakeups that will be happening because of underlying conditions in the tech industry. The result will be new alliances, former partners turning on each other, and uncertainty for vendors and buyers alike.

A big statement? Sure, but one backed with lots of examples other than this newest one about IBM’s interest in buying Sun:

• Oracle enters the hardware business in partnership with HP, potentially angering its other partners.
• HP is coming out with data switches for datacenter applications, coming in conflict with Cisco.
• Even Google is rumored to be developing a router.
• Cisco is not only entering the server market, but expanding the concept to treat computing, networking, storage, and virtualization as a single system, which means potential conflict with, oh, just about everyone.

Competition, deals, and consolidation are nothing new in the industry for a few reasons. Buying a company can bring products and technologies to round out the acquiring firm’s offerings. Also — and this is particularly trenchant, especially in today’s economy — companies run out of natural ways to grow to satisfy investors and look to acquisitions to feed the maw. And with the way the industry is going, as my BNET colleague Michael Hickins suggests, there’s a mad winner-take-all race on to capture the future of the data center.

According to Professor M. Eric Johnson, director of the Center for Digital Strategies at Dartmouth’s Tuck School of Business, Sun has been an acquisition target for some time. “Sun these days is a grab bag of cool technologies,” he says. “They really have not been able to articulate the business case around what they’re doing. To go out to an enterprise CIO and communicate who is Sun and why should we care about [us]? They haven’t been able to do that for years. For a lot of CIOs, Sun’s been marginalized. ”

IBM is of the size that swallowing other companies is an attractive strategy, and its competitive financial position is probably the strongest in its markets, making financing such a deal relatively easy. It has cash and a strong stock price. According Jean Bozman, an IDC research vice president, IBM could gain significantly from acquiring Sun:

• Sun has been well-positioned in the telecommunications, financial services, and government markets.
• The combination of OpenSolaris, java, and MySQL provides a formidable path into interoperability and open source.
• OpenSolaris also opens a wide door into the x86 server market.
• An existing pool of between 1.6 million and 2 million servers that Sun has sold and that will be coming up for replacement is a tempting market.
• Best of all, the deal would be dirt cheap when you look at the figures.

“Large companies are thinking how can I get through the recession and what will I do on the other side?” says Bozman. “What will the data center of the future look like?” The ability to manage a data center could convince a CIO to give the nod to a given vendor. Not only would Sun turn IBM into more of a multi-platform company, but IBM has one of the three basic frameworks for heterogeneous network management. (CA and HP are the other two vendors in that field.)

“Sun couldn’t end up at a better place,” says Stuart Cohen, CEO of the Collaborate Software Initiative, former CEO of Open Source Development Labs, and a former IBM veteran. “No one who could afford to buy Sun would be better at executing and implementing an open source strategy as part of their business.”

For Sun, the advantages would be trivialities like survival. Combining its technologies with IBM’s sales savvy could boost the fortunes of those involved. However, much of this would depend on an acquisition being successful, and according to some industry experts, that is hardly the only outcome.

“There are some major cultural differences between Sun and IBM,” says independent U.K.-based IT consultant Tom Kranz, who has undertaking high scalability projects using products from both companies. “Sun is very open about what they do and IBM isn’t. If you look at Sun, they’re very good at engaging the community and getting grass roots support. IBM doesn’t appear to have any ability or willingness to cultivate an ecosystem around their solution.” Those who were used to working with Sun might find the company’s technologies dispersed and pushed to the side by IBM’s entrenched employees who would have an interest in preserving their own positions.

Part of the infrastructure is the group of VARs, integrators, and resellers of Sun products who would be facing some serious questions. “What does it do for Sun’s product roadmap?” asks Mike Clesceri, executive vice president at Sun reseller Laurus Technologies. “Also, I’m concerned and interested in what the partner programs would look like. There have been acquisitions in the past where the channel partners of the company getting acquired may not be in the most beneficial position. There are some areas of the Sun product line that are very good and that have clear, huge advantages over what IBM has. And then there are lines with a lot of overlap. If there is [an acquisition], it would be interesting to hear what is going to happen.”

And then there is the rest of the industry. A deal between the two could turn into a major challenge for a number of companies according to analyst Judith Hurwitz, CEO of analyst firm Hurwitz & Associates. Not only would HP and Dell face an even more formidable contender, but the software assets of Sun could cause concern in other areas. Combining IBM’s current database holdings with MySQL “might even make them a bigger database player then Oracle,” Hurwitz says. Anyone want to bet on the likelihood of rumors of an IBM acquisition of Juniper or Brocade, putting it squarely in the networking hardware market and position it as a serious competitor to Cisco?