IBM is looking to acquire Sun Microsystems with an offer that is estimated to be in the region of $6.5 billion. This is about twice Sun’s market value, or it was until the rumors of an acquisition lifted the shares a little. But even at that price, should the bid succeed, IBM will get Sun at half what its value was a year ago.

Now you may be thinking that most server vendors are down 50% from their price of a year ago, but you’d be wrong. Aside from Sun, only Dell and Fujitsu have seen that level of attrition, and of course Sun was by far the worst of the bunch. It shares were down 80% from April 08 at one point, taking its value very close to the value of what remains from its once substantial cash pile.

The Demise of Sun Microsystems

It wasn’t this recession that killed Sun Microsystems, it was the one before that mortally wounded the company and it has been slowly fading ever since. There are lots of examples of companies where suddenly the company acquired critical mass and became unbeatable in its primary market. Examine the history of Oracle, Microsoft, Intel and Google and you can identify such points. In lesser companies (by size) such as Sybase, Progress and Intersystems, say, the company carved out a very stable business for itself, even if it ceased to grow dramatically at some point.

Sun Microsystems presents a quite different example. It was a kind of slow motion shooting star. It was at the center of the dot com boom and was doing dramatically well selling hardware at a furious rate to the dot coms and to the telecomms sector. Sun was stealing business from HP and IBM and it looked like it was a permanent fixture in the server hardware market.

When it introduced Java, Sun was hailed by some as an “the new Microsoft.” Ultimately that’s how and why Sun died. Sun was not a software company and had no idea how to become one. I remember a Sun software executive telling me at the time; “The problem with Scott McNealy is that he thinks software is just another product feature that sells the iron.”

If Sun wasn’t going to make its way in software it needed to become Dell, but unfortunately there already was a Dell. Sun may have been “the dot in dot com” but that’s all it was; “the dot in dot com.”

By 2004/2005 Sun had rolled up quarter after quarter of losses, declining revenues and failed attempts to revive its fortunes. None of Sun’s acquisitions on either the hardware or software side did much to reverse its fortunes. When Jonathan Schwartz took the helm from Scott McNealy Sun  managed to roll up some consecutive quarters of profit, but revenues still declined. When this recession began, Sun looked like an acquisition waiting to happen and now it seems, it’s happening.

Why IBM?

IBM used to be inept at acquisitions, until Lou Gerstner introduced some sanity into its acquisition process. Now IBM as very skilled in the process and has proved it many times. This is particularly the case in IBM’s software division where Steve Mills has rolled up and integrated a formidable portfolio of products. IBM is good at database and BI. It is good at software development (with both the Rational and Websphere portfolios). It is good at system and service management. It has even made a reasonable fist of the Lotus portfolio of products. Many of the products in these product portfolios were acquired then integrated into the mix.

I have little doubt that IBM can absorb Sun’s software portfolio and derive more revenue from it than Sun ever did. It will also be able to rationalize all the software partnerships that Sun had forged to its own advantage, displacing competitors with its own software in many instances. IBM made more money from Java than Sun ever did and if it acquires Sun it will have de facto control of Java.

On the hardware side, IBM stands to gain a big footprint in the telecomms sector particularly with mobile carriers, many of whom were deeply into Sun. IBM has done well in consolidation engagements replacing Sun hardware and thus it wont take much effort for it to put a formal migration program in place where it needs to. It can also slot Sun into its cloud strategy with a little bit of tinkering. Technically, Sun is pretty much cloud-ready. On the services side, IBM Global Services will undoubtedly find itself opportunities in the Sun customer base.

Sun comes with a cash pile of a bout $2 billion and thus a cash and stock swap deal could end up with IBM not depleting its cash pile much. From IBM’s perspective Sun will cost far less than the value of the sum of its parts. It has to be a good deal for IBM.