Wednesday, March 18, 2009

Sun runs into IBM's arms

The Wall Street Journal and the New York Times reports this morning that IBM is in talks to buy Sun Microsystems. Since the end of the dot-com bubble, the once-great company has fallen on hard times.

Sun twice was able to pull off a really clever positioning. First, they were the king of open — the leader of the Unix-based open systems movement. Unlike their competitors, they didn’t dabble in Unix but bet the whole company on it — and were particularly effective in using it to beat the once-great Apollo into waiting arms of HP. (This is the subject of a well-known academic paper by Raghu Garud and Arun Kumaraswamy). They also once had a large standardization organization, headed by my friend Carl Cargill, that played the standards game as well as anyone.

After that, Sun rode the dot-com wave better than anyone. If you were a VC-backed Internet startup in the 1990s, the first check with the VC money was to buy the Sun server so that you’d have something to deploy a production-quality 7/24 service. However, Intel spent hundreds of millions to create OSDL and target Sun’s core business with commodity Lintel boxes, and today such servers are more than adequate for most commercial purposes.

So with both the end of Internet growth and the commodization of Unix by Linux, Sun has been casting about for a third strategy. For almost a decade, Sun has been ambivalent about the open source tide that is ending its proprietary (if open standard) source of software differentiation.

It’s made big gambles (like a $1b on buying MySQL) to become more entrepreneurial and more aligned to open source, but the large established bureaucracy has rejected such outside influences. Despite ongoing layoffs, collapsing share prices and predictions of eventual failure, CEO Jonathan Schwartz has been no more effective than founder Scott McNealy at fundamentally transforming Sun into a lean, mean fighting machine.

The WSJ reports that the core turnaround strategy has changed:

In recent months, Sun has approached a number of large tech companies in the hopes of being acquired, said people familiar with the matter. The world's largest tech company, Hewlett-Packard Co., declined the offer, said a person briefed on the matter. A spokesman for Dell Inc., the world's third-largest server maker, declined to comment.
IBM seems like a good fit for Sun: if anyone has been able in the past decade to run an effective large IT company, IBM has. And now that Sun is a shell of their former greatness, most of the antitrust issues should be gone.

There is the question of East Coast vs. West Coast culture, but this does not seem like an example of such a disaster (as in my study of Linkabit’s 1980 acquisition). IBM is more innovation oriented than most East Coast firms, and Sun more bureaucratic than most West Coast firms.

IBM acquiring Apple in the 1990s would have been a disaster (but fortunately the self-serving Apple executives got greedy and demanded twice the price, paving the way for the Jobs II era).

Now Sun is in play, with its shares up 60% today. Its customers will reassured if it gets acquired and survives, and spooked if there are signs that the deal is going to fall through — leaving no other obvious edngame.

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