IBM said to be poring over Sun’s contracts

Lawyers for IBM (NYSE: IBM)are examining Sun Microsystems’ (Nasdaq: JAVA) contracts and other documents in a due diligence process that could precede an acquisition, according to published reports last week, citing unnamed sources.

Such work is common before a merger and suggests that acquisition talks between Sun and IBM, which were reported earlier last week but have not been confirmed by the companies, are still under way. Examining the documents could take a number of days, the report said.

The work being done includes an examination of Sun’s software license terms to see if any of them conflict with IBM’s business practices, the report read. Sun offers most of its software, including its Solaris OS, MySQL database and Java programming language, under a variety of open-source licenses.

News of the supposed merger talks was broken overnight about a week ago, though Sun and IBM have not confirmed nor denied any discussions. IBM would pay between US$6.5 billion and $8 billion to buy the company.

Observers have been puzzling over whether IBM is interested in Sun for its hardware or its software assets. IBM would gain some of Sun’s large corporate customers and widen its lead in the enterprise server market, where it was just ahead of Hewlett-Packard last year, according to IDC.

There would also be significant overlap between the companies’ product lines, however. Both have a Unix server OS, a RISC chip architecture, at least one enterprise database and a whole line of middleware. Any deal would create uncertainty for customers as to which products IBM would continue to develop and support.

Sun has been struggling to grow its business, particularly lately with the recession. Some of its biggest customers were Wall Street banks that either no longer exist or are in dire straits themselves.

Despite the uncertainty it would create, an acquisition by IBM might be a better outcome for Sun’s customers than some of the alternatives, said Dan Olds, principal analyst at Gabriel Consulting Group.

“The economic climate plays against Sun’s recovery strategy. I think they have probably made as many cuts as they can without really changing what they do and having to drop something big,” he said.

If the reports are accurate and Sun has decided to sell, the decision was probably driven by outside investors, notably Southeastern Asset Management, which increased its stake in Sun to more than 20 per cent last year and has been pushing hard for a bigger return on its investment.

“I think those guys are driving the bus at Sun,” Olds said. “This isn’t a strategic thing or a Jonathan Schwartz thing; it’s purely business.”

Talk of an acquisition has pushed Sun’s share price higher. It closed at $8.63 last Friday, up from $4.97 before the discussions were reported. IBM’s share price initially slipped on the reports but recovered slightly on the same day, closing at $92.66.

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