IBM to Buy Sun?

The Wall Street Journal reveals that “IBM [is] in Talks to Buy Sun in Bid to Add to Web Heft”, for “at least $6.5 billion in cash”. It represents around twice the market cap of Sun that has $3 billion of cash. Following this publication, shares of Sun jumped 79% and IBM was down 1%.

This analysis is focused on the storage activity of IBM and Sun. For this latter, the storage products revenues were $574 million for its last quarter ending in December 28, 2008, or 15.8% of its total sales.

It’s not the first time this rumor has been around – HP and EMC were also cited as possible buyers –  but, if this deal is confirmed, it could change a lot in the storage industry as these two companies are in the top ten list in this field.

To begin with, if this price is exact, it will be the highest acquisition in the history of the storage industry after the three following ones:

1. HP/Compaq in 2001 ($25 billion)
2. Symantec/Veritas in 2005 ($11 billion)
3. Compaq/DEC in 1998 ($9.6 billion)

For 2008, Gartner estimates that IBM was the number two in external disks with revenue of $2,450 million or a 13.4% worldwide market share. Sun is placed number six with $941 million or 5.2% of the market. Together they will not surpass leader EMC at 25.0%, but will fill part of the gap with 18.6% together, and largely in front of HP (11.6%).

Sun became serious in storage when it acquires StorageTek for as much as $4.1 billion in 2005, but didn’t use properly the potential of a firm with an historical and remarkable background in technology.

IBM also has a prestigious know-how in storage and StorageTek was one of its biggest competitors for many years. Remember that Storage Technology was a specialist of IBM-compatible disk for mainframes in the early years and continues to be its biggest challenger for tape systems.

The merger of their storage products is going to be tough
In the high end of disk subsystems, HDS will probably lose Sun as a customer as IBM has its own line of SAN and resell NetApp NAS.

In the midrange, the catalog of Big Blue is not really clear, with too many different products, some of them coming from LSI (as Sun), DataDirect Networks and others. Sun, working with Dot Hill, never was strong here but has announced few weeks ago a product developed by its own team – not StorageTek -, the Storage System 7000 Family with ZFS, a great file system, and SSDs. Big Blue has nothing to offer against these excellent devices excepting maybe the new XIV platform.

For de-dupe, we can imagine that IBM will prefer its own Diligent technology to FalconStor’ software handled by Sun.

For tape, it will be interesting to see what is going to do IBM, principally in the high end of the market where the two companies are the only ones in competition. Both of them sell 1TB drives (IBM TS1130 and Sun StorageTek T10000B), based on 3590-style cartridge, but not compatible at all. For its huge libraries, Sun has a large base of customers who will probably be happy with the merger as it was not really clear if Sun wanted to continue to push tapes. But, on the other side, Big Blue will get a complete monopole on the high-end tape market where the prices are already very high. By eliminating its only competitor, we think that IBM will then eliminates one of the two different tape technologies – the Sun’s one, of course – and will become, without any doubt, the worldwide leader in the (declining) tape industry if you add its revenue in LTO.

There could be also a strange situation if the deal is finalized. Sun and NetApp are fighting for patent issues on ZFS. Will IBM continue to pursue the Sun’s action against its OEM?