Sun Pulls a Yahoo?

Yahoo n. (def): Turn down an acquisition offer as inadequate today only to rue it tomorrow. As in, Sun just pulled a Yahoo.

According to The Wall Street Journal, acquisition talks between IBM and Sun Microsystems are “on the brink of collapse” today for a number of reasons, including too low a price and too much ability for IBM to back out of the deal. Perhaps it’s a negotiation tactic. But chances are more likely that we’re seeing another example of tech acquisition ego, where management and directors of a former high flier know that they are worth so much more — and management and directors of a long-time high flier assume that hardball always works.

If you check Yahoo Finance for Sun’s current status, you see an interesting pair of stories. First, Reuters reported that IBM reputedly cut its offer from $9.55 a share to $9.50 a share. According to that story, the higher price had already been negotiated last week. Not long after, the Journal ran its story.

A person familiar with the situation said that Sun has sent a notice terminating IBM’s agreement for exclusive negotiations, effectively breaking off the talks. In return IBM has withdrawn its offer to buy Sun, said a person informed about he [sic] situation.

When word of the talks first leaked people had expected Sun to fetch $10 to $11 a share, but the price apparently came down as Sun demanded assurances that IBM would proceed with the deal in the face of anticipated challenges by antitrust regulators.

As my colleague Michael Hickins notes, big mergers are never easy to pull off, particularly as the parties try to prove their testosterone levels. But there also seems to be plenty of ordinary blame and foolishness all around. Start with Sun. Even at $9.50, the price was a 91 percent premium over the $4.97 that the company’s stock had commanded in mid-March before any reports of the talks.

The problem for Sun is that, even more than was true with Yahoo, the company used to have much higher value. Yes, Sun has some great technology. But who cares? Having a great business is another world, because that means management is capable of taking all the company’s resources and somehow making more out of it than the sum of its parts. Today, the last trade was $8.49, clearly a run up on the rumor of the acquisition, because Sun’s announcement of its cloud strategy alone wouldn’t have been enough to drive demand that way. That’s because the company hasn’t been able to make a solid business case for what it’s been doing. Put another way, its strategy has been incoherent.

Perhaps Sun’s board will find another buyer. But in this economy, the question becomes which companies could benefit enough from the acquisition and have the money available to make a purchase? HP, perhaps. Dell could certainly use a better entrée to the data center. Microsoft or Oracle? Not a chance. As you start to go through the tech companies with top market caps, it becomes clear that Sun isn’t a great fit for all that many suitors. When you spurn one out of a small group, your leverage for better value in an acquisition suddenly drops because there is less demand and the fundamental laws of economics suddenly kick in.

But IBM isn’t showing a canny grasp of deal-making either. Yes, a nickel over many shares is significant money. But as I’ve pointed out, the deal was already a steal. This is an example of another manifestation of ego, not being satisfied with closing a smart negotiation, but wanting to dominate and crush the other side. Doing so may satisfy the reptilian brain of the honchos at IBM, but it wasn’t a rational step.

To drop an offer to press an advantage runs the risk of ticking off the other side so much that it decides to walk away from the table. And so IBM loses the chance to get a whole number multiplication of its investment as a return and to further put a lock on the datacenter. Not only that, but the company has essentially invited HP, which may not face the same regulatory scrutiny because it lacks the presence in the upper end of servers.

Insta-Yodel image via Flickr user Sudhee, CC 2.0.