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Update: IBM continues push for Sun, but will the deal kill Solaris?

IBM lowers offer for Sun, possibly in response to regulatory issues

April 2, 2009 12:00 PM ET

Computerworld - The high-stakes, but still under-the-covers battle by IBM to take over Sun Microsystems Inc. is still in play, but IBM may be rethinking what it is willing to pay for the enterprise vendor.

The Wall Street Journal, citing unnamed sources, reported today that IBM has dropped its offer to $9 to $10 a share, below its previously discussed price of $10 to $11.

The Journal on Friday reported that IBM is negotiating to acquire Sun for about $9.50 per share, and that the deal could be announced soon. However it was also possible that the deal could fall apart, the Journal said. The revised price would put the value of Sun at $7 billion.

What may be affecting IBM's offer is the potential delay because of regulatory oversight that the deal may bring.

If IBM takes control of Sun, it also gains much of the Unix server market. IBM has more than a 37% share of Unix servers, and Sun, at No. 2, has just over 28% of the market, according to research firm IDC.

Unix servers are heavily used in the high end of the market, where IBM is already strong, thanks to its mainframe business, and that is just one area that could prompt antitrust regulators to examine this deal.

The decision will also have major implication for users. Both companies have been in a lock-down about what a merger might mean and what technologies might live and die, but a merger could mean bad news for Sun's Solaris operating system, according to Paul Otellini, Intel's president and CEO.

At a recent company question-and-answer session, a transcript of which was filed with the U.S. Securities and Exchange Commission, Otellini warned that Solaris and Sparc are "likely to see EOLs over time through the IBM acquisition," he said. EOL stands for end of life.

Otellini said he saw no strategic reason for IBM to maintain Solaris and its Sparc processors "except to attempt to convert the very large Sun Sparc Solaris base to power" IBM. "I think that would be their most likely strategy as part of this," he said.

Intel has reason to be concerned about Solaris -- the company has a lot invested in the operating systems, said Herb Hinstroff, Sun's director of data center software business management.

Intel has "very large teams" that "are spending a whole lot of energy on Solaris," Hinstroff said in an interview this week. Intel is the No. 2 contributor -- after Sun itself -- to the Solaris code base, he said.

Hinstroff noted that during the same session, Otellini also indicated that he wanted to see Sun remain independent. Otellini's transcribed words on that point: "I'd rather have Sun be independent, I guess."

Rob Enderle, an independent analyst in San Jose, sees peril for Sun if these talks go on for much longer.

"The longer this process goes on, the less valuable Sun is, Enderle said, and IBM "is likely learning just how deeply Sun's executive management has trimmed the company, which is probably very close to nonviable at the moment."

"As a result, the property is worth less than they initially thought, he said, and the danger for Sun is that this could start to spiral, leaving Sun nearly worthless and without a buyer by the end of the process if they don't close quickly."

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