IBM-Sun Deal Collapse Blamed On 'Testosterone'

IBM’s bid for Sun was always an iffy proposition given the magnitude of the deal.

Big deals are by nature difficult to structure, which also explains why so many of them rarely work out as expected, even when they are consummated. Peter Fader, a professor at the Wharton School of Business noted that, “”In fact, in many cases synergies are more a myth than a reality. To the extent they exist, it is serendipity.”

When they result in a quasi-monopoly, as would have been the case in the Unix-based server and tape storage markets if Sun and IBM had managed to merge, companies also have to take into account the potential cost and delays inherent in anti-trust litigation and negotiations with regulators. This is the issue that ultimately separated management of the two companies, according to published reports.

Sun [management] feared that the offer gave too much “optionality” in purchasing Sun, said one person familiar with the talks, meaning that IBM would have too much leeway to walk away from the deal [if regulatory pressures grew too great].

Several factors seemed to have been at play: IBM’s lowered offer to compensate for the cost of terminating executive contracts and some partner relationships, and the impatience of both sides with shifting terms and conditions. In other words, personalities played a large part in scuttling the deal. The New York Times quoted an executive as saying, “‘There’s lots of testosterone going back and forth.’”

Indeed, most observers look at respective product portfolios and market share when analyzing the potential impact of mergers and acquisitions, but as my colleague Erik Sherman notes, personality also played a large role in the breakdown of the talks between Yahoo and Microsoft.

Personality can also get in the way of potential partners, as I noted in my recent post on the frosty relationship between Salesforce.com and NetSuite.

In contrast with the problematic Microsoft-Yahoo marriage, which most analysts believed was of dubious value to Microsoft, the merger of IBM with Sun was seen as IBM’s answer to Cisco, which is threatening to lock IBM out of the data center with its recent introduction of its Unified Computing System.

Analysts noted that acquiring Sun would have given IBM access to several products and technologies, including virtualization software, sophisticated storage systems, and OpenOffice.org, a popular alternative to Microsoft’s Office productivity suite.

Indeed, Microsoft has been slowly but surely developing a cloud-based computing platform to ensure its dominance in desktop applications continues as customers switch to Internet-based software delivery mechanisms. Sam Hiser, the former executive director of the Open Document Foundation, recently told me that “Sun is the cloud for Microsoft software. That’s why [IBM is] buying Sun — they’re interrupting the Microsoft cloud.”

With the stakes so high for IBM, not to mention Sun, which may not have a very long future as an independent company, it seems hardly conceivable that a deal of this magnitude could fall apart because the two parties have a falling out. The deal could still get made, but it’s useful to remember that personalities have an outsized and often ignored influence on whether mergers and acquistions work out or not.