IBM (IBM) To Pay Too Much For Sun (JAVA)

In a weak economy, troubled companies should never be bought at a premium. No one has mentioned that to IBM (IBM) which is looking at paying $10 a share for Sun Micro (JAVA) which would be almost 100% higher than where the stock trades now. Sun as been an also-ran in the server industry for close to a decade. It is hard to see what strategic value it has to IBM, but the larger company is flush with cash, and may not be able to help itself.

Sun has a long history of M&A activity that has done almost nothing to improve earnings. It has also been adroit at firing people. But, the company has not had any significant top-line growth in years. It has used cash to buy back its own shares. The move has done nothing to keep the stock price up, and, therefore, has done nothing for shareholders the way that a special dividend might have.

According toThe Wall Street Journal, “Acquiring Sun would bolster IBM as it takes on a new rival, Cisco Systems Inc., the networking company, which this week announced that it would start selling a server of its own.”

The investment would seem like an expensive way to pick up market share especially in the server business where machines are increasingly becoming commodities which has to put price pressure on vendors.

For Sun shareholders it does not matter who buys the company. It will end their trail of suffering.

Douglas A. McIntyre