The Rebirth: IBM Buys Sun

On Monday, IBM announced it would buy Sun Microsystems for about seven and a half billion dollars, and the news felt like a funeral and a resurrection at the same time. The company that had defined the internet boom, the company of Java and the network is the computer, was being acquired for a fraction of its former glory. The price was the verdict on the boom, and the verdict was the story of the year. The deal is the April 2009 story, and the story is the lesson: in a crisis, the giants of the previous era become the bargains of the next one.

The Rebirth is the subject of this article: what Sun had been, what it had become, what IBM was buying, and why the price told the whole story of the crash. The announcement came on Monday, April 20, and the industry spent the day trying to understand the deal. The analysts, the competitors, and the customers all asked the same question, and the question was the same in every office: what did the deal mean? This is the story of the acquisition, and the story is about the moment the market turned from destruction to consolidation.

1. The Announcement

The announcement was the confirmation of a rumor that had circled for months. IBM said it would acquire Sun Microsystems for nine dollars and fifty cents per share in cash, about seven point four billion dollars in total. The talks had collapsed in February, the reports said, and the collapse had been public, and the collapse had made the deal seem dead. The reports had said the gap was the price, that IBM had walked away from the table, and the walking away had been the end of the story. On Monday the deal was alive, and the announcement made it real.

The price was the headline, and the headline was the shock. Sun had traded in the single digits for months, the crisis had crushed every technology stock, and nine fifty was a premium over the market price. But the premium was the insult hidden in the compliment: nine fifty was a fraction of what Sun had been worth, a fraction of the one hundred billion dollar market value of the boom years. The number was the whole history of the company in one line, and the line was the tragedy. The announcement was the deal, and the deal was the verdict.

2. The Fallen Giant

Sun was the company of the internet's first golden age, and the golden age was long gone. Founded in 1982, Sun had ridden the workstation and server waves, had built the machines that ran the early web, and had coined the phrase that defined the era: the network is the computer. The company had been the dot com boom's favorite supplier, the company that the startups bought from and the investors believed in, and when the boom ended, the fall began.

The fall was long and slow and public. Sun lost money, cut jobs, and watched its server market share drain away to cheaper competitors and to the x86 machines that had made the datacenter a commodity. The company laid off thousands, sold off pieces, and tried new strategies, and the trying never stopped the slide. By 2009 the pioneer of the network was a company in retreat, a company with a glorious brand and a shrinking business. The giant had not fallen overnight; the giant had been falling for years, and the crisis was the final push.

3. The Fire Sale

The price was the story, and the story was the era. Seven point four billion dollars for Sun Microsystems was a price that would have been unthinkable a decade earlier, and the unthinkable was the point. The crash had cut technology valuations in half, and the buyers with cash were circling the wounded. The deal was a fire sale, and the fire was the financial crisis. Every acquisition of the spring was being read the same way, and the reading was the mood of the market.

The nine fifty per share was the number that made everyone stop. It was a premium over the stock price, and the stock price was already a wreck. The analysts did the math in public: Sun was being bought for less than the value of its cash and its pieces, the argument went, and the argument was the debate of the day. The bulls called it a steal, the bears called it a funeral, and the two sides filled the financial press. The fire sale was the reality, and the reality was the recession. The price said more about the moment than about Sun.

4. The Prize

The prize was the software, and the software was the reason. Sun owned Java, the most widely used programming language in the world, the language of enterprise applications and the language that ran on billions of devices. Java was everywhere, and everywhere was the point. The deal would make IBM the largest owner of Java on the planet, and the ownership was the strategy. The language was the crown jewel of the acquisition, and the jewel was the talk of the developer world.

The prize was more than Java. Sun owned Solaris, the enterprise Unix operating system, and the SPARC hardware that ran it, and MySQL, the open source database that Sun had bought the year before. The pieces were the portfolio: the languages, the operating systems, the databases, and the enterprise customers who depended on them. Each piece had its own community, its own history, its own reason to exist, and the reasons were the value. IBM was not buying the server business that was shrinking; IBM was buying the software and the customers that would last.

5. The Strategy

The strategy was the answer to the question everyone asked: why would IBM buy Sun? The answer was the enterprise. IBM had already moved from hardware to services, from machines to solutions, and Sun's technology was the plumbing of the enterprise world. The software, the support contracts, the installed base, the customer relationships: the deal was a purchase of the future, not of the past. The company was buying the right to serve the biggest customers in the world, and the right was the revenue.

The strategy was also the defense. Sun's customers were IBM's customers too, and the fear was that the failing Sun would be picked apart by competitors, that the Java community would scatter, that the enterprise stack would fragment. The rivals were already circling, and the circling was the urgency. IBM's purchase was a consolidation of the ecosystem, a way to keep the pieces together under one roof. The strategy was the logic of the merger, and the logic was the industry. The chessboard was being redrawn, and the move was the deal.

6. The Open Question

The open question was open source, and the question hung over the announcement. Sun had been the great corporate patron of open source, the company that had released its operating system and its flagship software to the community. Java, OpenOffice, MySQL: the projects were the heart of the open ecosystem, and the community wanted to know what IBM would do with them. The developers had built careers on the projects, and the careers were the stake.

The answers were promises, and the promises were the best IBM could offer. The company said the open projects would stay open, that the community would keep its place, that the deal was about growth not about closing things down. The skepticism was the mood of the day: the open source world had seen acquisitions before, and the history was mixed. Some remembered the promises of other mergers, and the remembering was the doubt. The open question was not answered on Monday; the open question was the watch on the deal.

7. The Industry

The industry reaction was the mirror of the moment. The technology world had spent a year in the dark, watching layoffs and bankruptcies and writedowns, and the deal was the first big sign of movement. The mergers were beginning, the argument went: the cash-rich would buy the cash-poor, and the map of the industry would be redrawn. The deal was the opening move of the consolidation wave. The wave had been predicted for months, and the prediction was coming true.

The reaction was also the reality check. The server wars, the operating system wars, the database wars: the deal redrew the alliances in all of them. The competitors watched, and the customers watched, and the analysts watched, and the watching was the mood of the market. The question on every desk was who would be next, and the question was the anxiety of the spring. The industry had been frozen by the crisis, and the deal was the first thaw. The thaw was the story, and the story was the spring.

8. The Lesson

The lesson of the deal was about the cycle, and the cycle was the crash. The companies that defined an era can be bought for a fraction of their peak value when the era ends, and the ending is the opportunity for someone else. Sun had been the symbol of the boom, and the boom's bust had made it a bargain. The lesson was that the crisis was not only destruction; the crisis was also the redistribution. The money moved from the fallen to the strong, and the moving was the market.

The lesson was also about the pieces that outlive the company. The name would fade, the hardware would shrink, but Java and the software and the customers would go on, owned by someone new. The companies die, the technology lives, and the living is the continuity. The deal is the April 2009 story, and the story is the lesson: in a crisis, the giants of the previous era become the bargains of the next one. The announcement came on Monday, and the industry went back to work with a new map in mind. The consolidation had begun, and the beginning was the point.

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