International Business Machines Corp.’s (IBM) reported bid to acquire Sun Microsystems Inc. (JAVA) signals an emerging war between technology titans.
The IBM move follows Cisco Systems Inc.’s (CSCO) splashy entry into the market for data centers and servers. A battle between IBM, Cisco and Hewlett-Packard Co. (HPQ) may lead to an arms race as the companies look to use cash hoards to bulk up through acquisitions. With share prices battered by a deteriorating stock market, a lot of bargains are available.
“The smart companies and the ones that look beyond the current slowdown and want to position themselves as the market leader – you’ll see them be very aggressive,” said Trip Chowdhry, analyst at Global Equity Research.
Acquisitions can shore up one’s position, as Sun would do for IBM, or provide a new capability, as Nuova Systems did for Cisco in the server business.
In attacking the $85 billion data-center market, Cisco has $4.2 billion in cash and $24.6 billion in fixed-income securities, Hewlett-Packard Co. (HPQ) has more than $11 billion, and Dell Inc. (DELL) has more than $9 billion in cash and short-term investments.
Given the size of the market, analysts say room exists for all four companies, although smaller players will likely feel the squeeze once Cisco starts to expand. Of the four, Dell may be hurt the worst by Cisco’s entry and IBM’s move to take out Sun.
IBM’s reported $8 billion deal to buy Sun Micro would allow the Armonk, N.Y., company to further integrate hardware and software, and glue them together with its consulting and services expertise.
H-P, meanwhile, also has expanded beyond simple hardware and, through last year’s $13.25 billion purchase of Electronic Data Systems, is looking at consulting and outsourcing as part of its service. Cisco brings a more closed system than the others, but adds networking expertise and a simpler, more integrated approach.
Jean Bozman, an analyst for IDC, said the Sun deal positions IBM for the expected consolidation in the server market. She said IBM is aware of Cisco’s ability to reshape a market it enters. IBM is the largest server vendor, with a market share above 31%, according to IDC.
IBM shares fell 1.3% to $91.72, H-P shares dropped 3% to $28.85, and Cisco shares added 2.4% to $16.51. Sun Micro shares surged 82% to $9.04.
Despite the sheer amount of cash on hand, industry observers only see a few major acquisitions, with a majority of deals in the hundreds of millions of dollars. Chowdhry said he expects the number of tech companies to fall by 40% to 60% as a result of consolidation and bankruptcy.
Beyond Sun, Red Hat Inc. (RHT) and Satyam Computer Services Ltd. (SAY) are prime candidates for takeover, Chowdhry said. Red Hat offers the kind of software Cisco and H-P need, while Satyam provides IT services. Neither company was available for comment.
If H-P wants to stay competitive, it should pick up IT services provider BMC Software Inc. (BMC), he said. H-P, however, is still working through its EDS buy.
BMC shares rose 1.5% to $30.21. Shares of Red Hat rose less than 1% to $15.65, while Satyam shares added 5% to $1.66.
For H-P, Blade Network Technologies Inc. and Arista Networks Inc.are two of many start-ups that could get bought in the coming months. Both companies make switches that go on top of so-called blade servers – a necessary component to keeping up with Cisco’s integrated system.
Blade CEO Vikram Mehta said he believes the proprietary approach Cisco is taking won’t fly with budget-conscious IT managers. Arista couldn’t be reached for comment.
Cisco, meanwhile, could pick up an EMC to augment its data center business. The companies are working together with Cisco’s new server initiative. NetApp Inc. (NTAP) is another data storage expert that has been named as a potential candidate.
EMC shares gained 2.4% to $11.24, while NetApp jumped 7% to $15.87.
“This is a great market to be a buyer of anything,” said Carl Howe, an analyst for research firm Yankee Group.
Dell could look for acquisitions, but given its stock, the company or its server division could potentially be a candidate for acquisition. Dell shares gained 2.5% to $9.57.
Dell declined to comment on rumor and speculation.
H-P questioned IBM’s deal with Sun, saying there is a lot of product overlap. Also, the company isn’t sure that the high price tag willpressure it to do anything, according to someone familiar with the questions H-P executives have about the deal.
Cisco was more open to the deal.
“Given the challenging macroeconomic environment and rapid innovation in the technology market, we see consolidation in the industry as inevitable,” said spokesman Terry Alberstein.