IBM Rises to Record as CEO Palmisano Focuses on Software, Services‏

Bloomberg

 

International Business Machines Corp. rose to the highest level since it went public in 1915 as investors show support for Chief Executive Officer Sam Palmisano’s strategy of remaking the 99-year-old company.

IBM gained 88 cents to $138.72 at 4:01 p.m. in New York Stock Exchange composite trading, topping the previous record of $137.88, adjusting for stock splits, reached in July 1999. Palmisano has focused on services and software, making the company once known for mainframe computers into the world’s biggest computer-services provider.

Since Palmisano became CEO in March 2002, IBM shares have risen a third as he divested hardware units, including the personal-computer business sold to China’s Lenovo Group Ltd. in 2005. In May, he said he expects Armonk, New York-based IBM to almost double operating earnings to $20 a share by 2015, as he continues to focus on more profitable software and services.

The shares are also benefiting as investors predict corporate customers will invest in information technology, said Lou Miscioscia, an analyst at Collins Stewart Plc.

“There was a big concern investors had about IT succumbing to the macro slowing -- that was overblown,” said Boston-based Miscioscia, who has a “buy” rating on the shares and has the highest price target of any analyst tracked by Bloomberg, at $160. “Companies continue to want to invest.”

IBM has also boosted shares by buying its own stock. Since 2002, the company has spent more than $68 billion on buybacks, equal to almost 39 percent of its current market value.

Help From HP

Of the 26 analysts who rate IBM, 18 recommend buying, including nine who predict the stock will reach at least $150. Eight analysts recommend holding the shares and none recommend selling them.

The Dow Jones Industrial Average, which includes IBM, lost 19.07 points today to 10,948.58.

IBM shares are also likely gaining as investors leave its closest rival, Hewlett-Packard Co., amid uncertainty at the company, Miscioscia said. HP’s CEO Mark Hurd retired Aug. 6 after an investigation found he violated business-conduct standards. Last week, HP hired Leo Apotheker, former CEO of software maker SAP AG, to replace him.

“Given that the new CEO at HP has to prove himself, that does create more of a cloud of uncertainty,” Miscioscia said. HP shares have dropped 12 percent since the announcement of Hurd’s departure.

The company that became IBM was incorporated on June 16, 1911, as Computer Tabulating Recording Co. Created by a merger of three businesses, CTR sold items ranging from punched cards to cheese slicers, according to the company’s website.

Watson, Gerstner

Thomas J. Watson Sr., known as IBM’s founder, joined the company in 1914. He became president less than a year later, and began focusing on building large tabulating machines for businesses. In 1924, after expanding the company outside the U.S. and building other corporate machines, he changed the name to International Business Machines Corp.

By 1993, the company had posted three straight years of losses, including $8.1 billion that year. The company faced a possible breakup when IBM chose Lou Gerstner as its chief that year -- the first time IBM went outside the company for a CEO.

He helped increase the share price about ninefold by cutting thousands of jobs, keeping the company’s units together and marketing software and services along with hardware. Gerstner wrote a book about his experience called “Who Says Elephants Can’t Dance?”

IBM Investments

Palmisano continued the transition of what was once the world’s largest computer maker. The focus on software and services has helped expand IBM’s gross-profit margins more than 8.5 percentage points since he took over. He’s spent more than $20 billion on over 100 purchases.

In May, Palmisano said he plans to spend another $20 billion in acquisitions through 2015. Last month, IBM announced three acquisitions, including the $1.7 billion deal for storage- analytics maker Netezza Corp. and a purchase of software maker OpenPages Inc. for an undisclosed sum.

IBM is investing in markets such as analytics software, which helps companies predict trends, and cloud computing, which lets them store and access information on shared servers. The company is also developing services to monitor highways, electrical grids and other infrastructure systems to help them run more efficiently.

Increased sales of those technologies, along with growth in markets such as Brazil and China, will add $20 billion to revenue by 2015, IBM has said. The software segment, the company’s most profitable, will make up about half of total profit by then.

Will Web-scale Servers Find a Role in the Enterprise?

PC World

An emerging class of extremely low-power servers is helping Internet companies and hosting providers to slash their energy bills, and proponents say they could have a role in the enterprise as well.

The servers, offered by established players such as Dell and SGI as well as start-ups such as SeaMicro, cut power use by reducing server components to a minimum, aggregating fans and power supplies across several servers, and employing low-power processors normally used in netbooks and other mobile devices, such as Via's Nano processor and Intel's Atom chip.

Examples include Dell's "Fortuna" server, which crams 12 mini servers based on Via Nano processors into a 2U chassis. It's a fully functioning server with its own storage, memory, management controller and dual 1GbE cards, but each server consumes less than 30 watts of power at full load -- far less than a typical server of the same size. Dell developed the server with Web hosting companies in mind.

More radical is SeaMicro's SM10000, introduced in June, which crams 512 single-core Z530 Atom chips into a 10U system, or about a quarter of a standard server rack. SeaMicro's breakthrough is a custom ASIC that replaces most of the components on a typical server board, including storage and networking controllers, leaving just three chips: the processor, DRAM and ASIC.

"The big processors are like taking a spaceship to the grocery store for most problems today," says Andrew Feldman, SeaMicro's CEO. "What you really need is a Prius."

SeaMicro says the boxes provide equivalent performance at a fraction of the power of traditional rackmount servers, and in far less space. It can cram 2,048 Atom CPUs in a fully loaded rack that burns just 8 kilowatts.

The low-power processors are not powerful, but they are well suited to workloads that can be broken into many smaller, separate tasks that are executed independently, said John Abbott, chief analyst at The 451 Group. "That's what the big CPUs from Intel and AMD aren't good at; they have to be fully utilized or they're not being efficient."

Web-scale companies such as Yahoo and Microsoft use the low-power servers for jobs like dishing up search results or displaying status updates. They are also popular among hosting providers who want to offer customers a dedicated server at minimal cost.

Data mining and more

While those companies are the main target for these low-power servers today, proponents say they could be used in the future for certain tasks at large corporations. The example most often cited is large-scale data mining, where the servers can be used to uncover trends among terabytes of data such as financial transactions, customer records and weblogs.

"I'm not advising anybody to migrate enterprise workloads to these new platforms. That would be a disaster," says Forrest Norrod, who run's Dell's server division. "But when you are doing new development, new services, you've got to start considering these new cloud architectures because they are going to offer the lowest marginal cost to compute."

For data mining, tools such as Apache Hadoop, which is open source software inspired by Google's MapReduce, allow petabytes of data to be distributed across a cluster of commodity servers and then searched and analyzed at high speed. Aster Data and Greenplum, recently acquired by EMC, also offer tools for distributed data mining.

"The big Web guys use this technology to ingest their weblogs," says Mike Olsen, CEO of Cloudera, which makes a commercial supported version of Hadoop. "They want to watch their user behavior at a very fine, granular level -- what pages do they visit, how long do they spend there, where do they go next."

But some financial services companies are running Cloudera for similar tasks, Olsen says. He cites one customer, a large bank that has acquired dozens of smaller banks throughout the United States. Each has customer data locked in siloed applications for tracking credit cards, debit cards and home mortgages.

"You want to be able to analyze that data to do a risk assessment, which is critical, but there's no way to easily search across all that data where it resides or to identify multiple instances of the same guy," Olsen says.

The bank copied the data into a large Hadoop cluster where it can search for patterns in a way it was unable to do previously, he says. For example, it can look for customers that defaulted on loans and analyze their transaction history during the preceding months, to uncover patterns that might help identify customers likely to default in the future.

Another potential use case is running the middleware used to authenticate and connect mobile workers to back-end ERP and CRM systems. "When everyone with a smartphone logs onto your corporate network at 8 o' clock on Monday morning, there's a server-side app that has to secure and maintain each connection," Norrod says. "That area is exploding and it's ideal for this type of system."

High-performance computing applications are also fertile ground. Scientists at the University of Kentucky are using a cluster of Dell C6100 servers, which were designed to offer high compute density, to simulate and analyze the movement of molecules. Vince Kellen, the university's CIO, says the systems could also be used for simulations in drug design or mechanical engineering, or for processing large audio and video files. "It's potentially useful wherever a large file can be broken into many pieces and analyzed," he says.

For sure, there are obstacles to the adoption of such systems in the enterprise. Big Internet companies tend to have homogenous workloads and can fine-tune their data centers for a particular set of applications, says Andy Bechtolsheim, a systems designer who co-founded Sun Microsystems and now leads product development at Arista Networks. "They have in many ways a simpler problem than enterprise data centers," he says.

He believes that "the jury is still out" on whether servers based on low-power Atom and Arm-based processors are really more energy-efficient. "What matters is not absolute power consumption but rather power efficiency, i.e., power used per application throughput," Bechtolsheim says.

Applications that will run across such a distributed architecture must usually be custom written, and there are technical limitations to the types of workloads that can be moved to a cluster of low-power systems.

"The things that become a challenge are the input/output resources and the cache resources, which are not something that these systems are known for," says Bill Mannel, vice president of product marketing at SGI. "So as soon as you get in a situation where you need to move a lot of data in and out, that's when you see a fall-off."

But SeaMicro's Feldman argues that pressure to reduce costs is forcing companies to explore alternatives.

"Today's databases are punishingly expensive and historically they run on expensive servers," he says. "People are doing anything they can to avoid buying more of them, and that's where software like Hadoop comes in."

Oracle, HP, Intel, IBM Foresee a Boom in Tech Spending

USA Today

 

 

Acquisition fever at Oracle, Hewlett-Packard, Intel and IBM probably won't cool down anytime soon; not with corporations, big government and large organizations — the so-called enterprise sector — poised to spend trillions on the next generation of digital systems.

Tech research firm Gartner this week forecast that enterprises worldwide will spend $232 billon on software alone this year, up 4.5% from 2009.

Meanwhile, overall spending for hardware, software and IT services should hit $3.4 trillion this year and $3.5 trillion in 2011.

The tech giants are anticipating that enterprises will build out new, cutting-edge networks tuned to extract valuable insights from the massive caches of data they've amassed.

Growth will come to those organizations that productively use this new intelligence in near-real-time, on PCs, smartphones and mobile devices.

Intel CEO Paul Otellini used a descriptor for this movement at Intel's Developers Forum in San Francisco two weeks ago.

He called it "pervasive computing."

Otellini described a world where enterprises routinely access not just raw data, but valuable business intelligence applied to that data, "anywhere, any time and in any way," says Charles King, principal analyst at Pund-IT.

Oracle, Intel, IBM and HP are in the race to assemble lower-cost, more streamlined hardware and software components that mesh well and can deliver business intelligence in near-real-time.

The tech rivals are striving to "integrate and control the correct pieces" and be the most successful at "providing functionalities that work in concert, so that it's like a symphony," says Mike Workman, CEO of data storage company Pillar Data Systems.

The projected beneficiaries: airlines, utilities, health care companies, retailers or any business in possession of lots of data.

IBM on Monday announced that it is buying business intelligence software and hardware maker Netezza for $1.7 billion.

That follows HP's acquisition of storage company 3Par and tech-security firm ArcSight; Intel's acquisition of anti-virus supplier McAfee and the wireless division of German tech company Infineon; and Oracle's six acquisitions this year, including swallowing up Sun Microsystems.

"IBM's acquisition of Netezza is yet another validation of just how important advanced analytics is in the business world right now," says Barry Zane, chief technical officer of business intelligence software maker ParAccel. "There is no question the industry is hot right now."

More buyouts of smaller tech companies developing cutting-edge storage and security systems and innovative business-intelligence applications seem likely as the tech giants pursue the winning blueprint, says Jack Gold, principal analyst at J. Gold Associates.

"The ability to store all business applications and data centrally and to make it all available to users is a very powerful paradigm shift," Gold says. "It requires cheap and fast networks."

Workman gives database giant Oracle, and its new Exadata line of storage servers, the early lead.

Oracle juiced up Exadata by integrating its flagship database software into Sun's high-end computer servers, he says.

IBM's acquisition of Netezza, supplier of technology that competes directly against Exadata, came as no surprise to Workman.

Intel and HP likewise remain in shopping mode as they try to "integrate various systems to arrive at a solution that will kick the other guy's butt," Workman says.

IBM to Buy Unica for $480 Million to Gain Software

Bloomberg

 

International Business Machines Corp., the world’s largest computer-services provider, agreed to buy Unica Corp. for about $480 million to gain technology that lets customers build more targeted marketing campaigns.

Unica shareholders will get $21 a share in cash, Armonk, New York-based IBM said today in a statement. That’s more than double the stock’s closing price yesterday.

IBM Chief Executive Officer Sam Palmisano said this year he is planning to spend about $20 billion on acquisitions in the next five years. The software unit, IBM’s most profitable, will make up about half of its earnings in 2015, the company said in May. The unit has made about 60 acquisitions since 2003.

Unica, based in Waltham, Massachusetts, makes software that helps organizations analyze and predict customer preferences, helping their marketing efforts.

“Done well, marketing becomes less of an annoyance and more of a service,” Craig Hayman, general manager of IBM’s Industry Solutions unit, said in an interview.

Unica has 500 workers and its customers include EBay Inc. and Best Buy Co. It helped ING Groep NV customize its marketing across websites and branch offices to appeal to individual preferences, said Yuchun Lee, chief executive officer of Unica.

“We help make sure the messages are personalized and relevant,” said Lee.

IBM said it expects to close the deal in the fourth quarter.

IBM Investigated by EU Regulator Over Mainframe Market

Bloomberg

International Business Machines Corp., the world’s biggest provider of computer services, is being investigated by the European Union over claims it abused its dominant position in the market for mainframe computers.

The probe will review claims IBM linked sales of its hardware to its software for mainframe computers and that IBM discriminated against competing sellers of services for the computers, the Brussels-based European Commission said in a statement today. IBM said the probe was the result of a campaign by “proxies” of competitors led by Microsoft Corp.

The commission, the antitrust regulator for the 27-nation EU, said the probe is partially in response to a complaint by T3 Technologies Inc., which Microsoft invested in. T3 makes software that transfers mainframe functions to servers that can run Microsoft’s Windows operating system.

Even as IBM has shifted away from hardware to focus on software and services, the mainframe has remained of central importance to the company. Though IBM gets less than 4 percent of its revenue directly from selling mainframes, the machines help generate sales of software, services and financing. Altogether, the contribution is almost a quarter of IBM’s sales and 40 percent of its profits, Sanford C. Bernstein analyst Toni Sacconaghi wrote in a report today.

IBM, based in Armonk, New York, said in a statement that “there is no merit to the claims being made by Microsoft and its satellite proxies.”

Microsoft Probes

“Certain IBM competitors which have been unable to win in the marketplace through investments in fundamental innovations now want regulators to create for them a market position that they have not earned,” IBM said.

Frank Shaw, a spokesman for Redmond, Washington-based Microsoft, said in an e-mail that the company invests in startup companies such as T3 to give customers greater choice. The company isn’t a party to T3’s complaint against IBM, he said.

“We do share T3’s belief that there needs to be greater openness and choice for customers in the mainframe market,” Shaw said. “Customers tell us that they want greater interoperability between the mainframe and other platforms.”

IBM added 3 cents to $128.41 in New York Stock Exchange trading. Microsoft rose 29 cents to $26.10 in Nasdaq trading in New York.

The EU has previously punished U.S. technology companies, including Microsoft, in antitrust cases. Last year, Intel Corp. was fined a record 1.06 billion euros ($1.37 billion) and ordered to stop using illegal rebates to thwart competitors.

T3

Microsoft last year settled an antitrust case with the EU over its Internet Explorer browser and has previously paid fines of 1.68 billion euros in EU probes.

The case was triggered by T3 and another vendor, Turbo Hercules, and involves IBM’s alleged tying of mainframe hardware to its operating system, the commission said.

T3, a company that builds mainframe computers and is mentioned in the CCIA’s report, made a similar complaint against IBM to the commission. Similar antitrust claims the company made against IBM in a New York court were dismissed in September.

“We’re pleased that the commission has taken this important step,” said Dave Anderson, a lawyer representing T3.

The second probe involves complaints of discriminatory behavior by IBM against competing suppliers of maintenance services for the computers.

“The commission has concerns that IBM may have engaged in anti-competitive practices with a view to foreclosing the market for maintenance services,” the EU today said in a statement, “in particular by restricting or delaying access to spare parts for which IBM is the only source.”

Newest Mainframe

IBM began developing mainframe computers in the 1940s and 1950s and is now among the few companies to offer the systems. The company announced its newest mainframe, the zEnterprise, last week. The model, up to 60 percent faster than its predecessor, uses IBM software to integrate it with smaller server computers.

The company comes out with a new mainframe every two to three years. After the introduction of the last five models, sales in its services division, more than half its total revenue, rose an average of 3 percent, Deutsche Bank analyst Chris Whitmore wrote in a report. Excluding the 2008 update, which came during a recession, the boost is 9 percent.

The mainframe, along with services and software growth, will help IBM raise total sales this quarter even with a currency impact, Chief Financial Officer Mark Loughridge said this month. Last week, IBM reported second-quarter sales that climbed 2 percent to $23.7 billion, with a $500 million hit from currency.

If IBM Buys Sun, What Does It Mean For Linux?

Originally Posted to ZDNet

Rumor has it, IBM is looking at buying Sun. No surprise that we’re seeing consolidation in a down market, but will this mean consolidation in the open source space?

I’ll let others speculate on the affect it might have on the hardware market, but I’m curious what would happen to the open source operating system ecosystem. Would IBM keep trying to build a separate OpenSolaris community, or put all the weight behind Linux?

The two communities can (and do) exist side-by-side, and Sun’s contributions to FOSS projects like GNOME benefit the entire FOSS ecosystem - not just OpenSolaris. Sun doesn’t have the same conflict of interest that IBM would, though.

Would IBM continue to support Linux if it had a second open source operating system to look after? In trying economic times, one has to wonder. IBM has been a staunch supporter of Linux, but the company has also dabbled in OpenSolaris, and still maintains AIX. From the corporate viewpoint, it might seem to make more sense to back either Linux or OpenSolaris, rather than maintaining AIX, OpenSolaris, and putting support into Linux as well.

Linux and OpenSolaris are both free *nix operating systems, so why does it matter if IBM goes the OpenSolaris route? It comes down to control: No single vendor controls Linux’s destiny. Red Hat, Novell, Canonical and all of the other vendors participating in Linux development have limited control over development, and their customers have plenty of options.

Even the Linux Foundation is merely a steward for some of the community’s resources, and doesn’t control the direction of the kernel or the larger software ecosystem that make up Linux distros.

Customers have their choice of Linux vendors, contributors have their choice of projects to contribute to. That’s not really true of OpenSolaris. For Solaris/OpenSolaris, there’s really only one game in town. True, a few OpenSolaris derivatives have popped up, but none have the resources of a major company or large project behind them. Backing OpenSolaris means putting a lot of trust in the company behind it. True, the community or a competitor could fork OpenSolaris, but bootstrapping that sort of thing would take time and a lot of effort.

And for IBM, OpenSolaris would require a lot more manpower in the long run. It seems that it would make more sense for Big Blue to provide a migration path for Solaris customers to Linux.

It’s all speculation right now, but if the deal goes through, I hope IBM signals its intentions early on.

Why Big Blue Sun Makes Sense

Originally Posted at ZDNet

IBM is reportedly in talks to buy Sun Microsystems for $6.5 billion and the deal is long overdue. The companies mesh on the open source software front, Sun is struggling and IBM can consolidate some server market share.

First, the headlines. The Wall Street Journal is reporting that IBM could acquire Sun as early as this week (Techmeme). IBM would pay all cash for Sun. The Journal also reported that Sun has approached a number of large companies about an acquisition; a move that throws cold water on CEO Jonathan Schwartz’s everything is fine video.

Dana Gardner counterpoint: IBM buying Sun Microsystems makes no sense, it’s a red herring

Behind the scenes here, we’ve frequently had chats about how IBM would take out Sun. The only real debate was whether Big Blue would acquire Sun in parts or as one sum. The working assumption was that Sun would be broken up and sold in parts, but the IBM deal also works nicely. Here’s why the deal makes some sense:

IBM can acquire server and storage share. Sun still has a lot of hardware on the market in key verticals such as finance and telecom. The problem is that Sun is reliant on U.S. sales and that’s not a fun place to be right now. With Cisco entering the server market the profit margins could be squeezed—especially if the server essentially becomes a storage and networking box too. By acquiring Sun, IBM gets more scale so it can endure the margin squeeze. That same argument holds for storage hardware too.

There are issues to be worked out on the hardware side though. IBM has refrained from commodity servers and Sun plays in that space. Meanwhile, servers run on different chips–Sun has Sparc and IBM has the Power architecture.

The time is now. IBM is a software and services company, but it needs hardware, which would be roughly a third of revenue with Sun, to sell its other offerings. Hardware is often the entry point for IBM’s software and services. With a stronger hardware business it can fend off HP in the marketplace.

Sun is a powerhouse in Unix, which is still a key platform, but isn’t exactly gaining in the market these days. IBM could acquire Sun and establish two key beachheads: Linux and Unix. The former will ultimately take over for the latter in the data center. IBM can play both and sell you the services to migrate while it’s at it. Bonus for Big Blue: Sun would enable it to pressure HP’s Unix-based businesses too.

One problem: IBM sells AIX Unix servers. Sun sells Solaris (hat tip to a reader pointing that out).

Sun has to do something. Sun is a company that has to transition a legacy hardware business to one modeled more on open source software and services. That’s a wrenching change that may not work out. An exit ramp makes sense right now. Besides, Sun was reportedly turned down by HP and Dell was mum.

This about HP NOT Cisco. The initial headlines will paint IBM’s move as a reaction to Cisco’s entry into the data center. The reality is HP is the target. HP acquired EDS to directly take on IBM. IBM is returning the favor by squeezing HP on hardware.

Open source software. Sun’s future is offering an open source stack of software led by MySQL at its core. IBM is all about open source. The two together make a lot of sense and IBM could pull MySQL, Lotus, OpenSolaris and other parts together in a nice stack. In addition, Sun’s open source software needs distribution—it recently did a deal with HP. IBM has distribution galore. Matt Asay has a good post on how IBM can monetize open source.

One problem: There’s a lot of software overlap here. In databases, IBM has DB2 and Sun has MySQL.

Java. Java is arguably Sun’s best asset, but the platform was never monetized. Perhaps IBM will have better luck.

Cloud computing. Sun has some interesting ideas on cloud computing and its plans could work. Sun has also made targeted cloud computing acquisitions. Meanwhile, Sun has a cloud computing press conference Wednesday morning, a shindig that will be dominated by IBM talk now. A few folks seemed to buy that Sun-as-cloud-player marketing, but it really looks like a relabeling to me. IBM could absorb Sun’s plans in its big cloud services offering. Also see: Handicapping cloud computing: The big picture.

It’s about consolidating the data center. Data center managers will want fewer throats to choke and Cisco isn’t going to make life easier. Sun can allow IBM to consolidate a data center rival and bring things back to equilibrium now that Cisco has entered the market.

What could go wrong? A few items. For starters, there are regulatory concerns. Who knows whether the Obama administration would approve this deal. IBM would have roughly 42 percent of the server market with Sun, according to IDC. HP, however, would be second wind 29.5 percent. With Dell a strong No. 3 with 11.6 percent share the IBM-Sun deal should pass scrutiny. But it is a wild-card.

Here’s a look at the server market share standings:

And then there’s culture. If you want to know the big cultural difference look no farther than Schwartz’s ponytail vs. IBM’s typical look. IBM is all business and Sun is sort of business with a lot of Silicon Valley shtick. That said Sun’s workers may find themselves relieved by the IBM deal. Sun’s upcoming struggles are fairly obvious and IBM looks like a great option for those that choose to look ahead.

Update: Sun shares had a predictable response to the news, soaring 72 percent in premarket trading.

Update 2: Pondering the valuation: As of its most recent quarter, Sun had $2.6 billion in cash, equivalents and short-term marketable debt securities. So the rest of the business is worth $4 billion roughly. One working theory is that IBM would potentially buy Sun and sell the hardware business to Fujitsu, a close partner of Sun. IBM could license Solaris, since it would own the code, to Fujitsu. Assuming IBM does sell some hardware assets to Fujitsu for $1 billion or so the Sun acquisition doesn’t look so large.

Meanwhile, analysts are mixed on the deal. UBS analyst Maynard Um says in a research note:

Our Sun thesis has been that there is a potential restructuring story given relative inefficiencies. We do think IBM would be in a position to take out cost more quickly, however, we expect Sun revs to continue to be pressured in FY09 & FY10 given its reliance on high end servers and limited ability to monetize its software. And while IBM is certainly financially capable of purchasing Sun, we would note that a $6.5bn acquisition would be large even by IBM’s standards, and would also be a deviation from IBM’s current strategy of tuck-in acquisitions.

Final Chapter For Sun Micro Could Be Written By IBM

As Originally Posted at The Wall Street Journal

Sun Microsystems Inc. has been at the leading edge of some of the biggest trends in computing since the 1980s. But the Silicon Valley company has often lagged behind at making money from them.

Now the time to do so may be running out for Jonathan Schwartz, the brainy software specialist who became Sun's chief executive in 2006.

The disclosure of talks for Sun to sell itself to International Business Machines Corp. caused Sun's stock to jump nearly 79% Wednesday to $8.89 on the Nasdaq Stock Market.

If the deal does go through, IBM is likely to pay $10 to $11 a share for Sun, according to people familiar with the matter. That would put the purchase price around $8 billion -- or about $6.5 billion including the $1.4 billion in cash on Sun's balance sheet.

While negotiations are under way, a transaction might not occur and the talks could fall apart, these people said.

Mr. Schwartz declined to comment through a Sun spokeswoman, who characterized the reported talks with IBM as "rumor and speculation" that the company would not discuss.

But there is no debate that a sale to IBM would mark an inglorious end to an industry leader that once boasted it put "the dot in dot-com" and reached a market value of $205 billion during the Internet bubble.

Under Scott McNealy, Mr. Schwartz's predecessor, Sun exemplified an era in which big companies could be built by giving engineers the freedom to chase new ideas. That management philosophy now seems an endangered species, as competition, slowing sales and other forces create consolidation pressures and a focus on profitability.

Sun, a major maker of computer server systems, has suffered disproportionately from the recession because of a reliance on high-end systems sold to the hard-hit financial industry. But some customers, former Sun executives and analysts said management mistakes contributed heavily to Sun's problems.

Among the biggest was a belated move to adopt low-cost servers that use so-called x86 chips from Intel Corp. and Advanced Micro Devices Inc., instead of chips called Sparc that Sun designed.

Some once-loyal Sun customers, such as the online software company Salesforce.com, said they saved big money by adopting alternatives; the San Francisco company chose to move to x86 servers supplied by Dell Inc.

"Sun's culture is not really about the customer -- it's more about them and their technology and their engineers," said Marc Benioff, Salesforce.com's chief executive, in a recent interview.

Sun, founded in 1982, first shook up the market for computer workstations -- single-user machines favored by engineers, product designers and others that need intensive computing capability.

The company came out with low-priced, powerful workstations that were designed by co-founder Andreas Bechtolsheim. They ran a type of industry-standard software called Unix that was adapted by Bill Joy, another Silicon Valley technologist.

Mr. McNealy, who remains Sun's chairman, provided the management skills, helping the company to outmaneuver larger competitors and later execute a shift into the market for server systems.

Some of Sun's inventions continue to have an impact. The idea of publishing software specifications, which helps prevent customers from being locked into a supplier, is now embodied in "open-source" software such as Linux.

At times, Mr. McNealy and other Sun executives showed a tendency to deride other companies' technology. Sun became a major Microsoft Corp. critic and legal opponent, until Microsoft in 2004 agreed to pay Sun nearly $2 billion to settle an antitrust case and other disputes.

Mr. Schwartz was promoted from chief operating officer to CEO as Sun was struggling to regain its early Internet-era growth. Many observers saw him as a positive force, a view bolstered when he acknowledged past mistakes. He has pushed to offer open-source versions of Solaris, its popular Java programming technology and other products.

But some other moves promoted by Mr. Schwartz have been panned, including Sun's $4.1 billion purchase of tape-drive maker Storage Technology Corp. in 2005, a business seen as slow-growing.

The $1 billion Sun paid in 2008 for MySQL AB, maker of a popular open-source database program, was also characterized by some analysts as excessive.

Ulf Michael Widenius, a MySQL co-founder who recently decided to leave Sun, praises Mr. Schwartz's vision but said he hasn't been able to fix Sun's bureacratic middle-management structure. "He knows what the right way is, but it is simply not done," Mr. Widenius said.

Mr. Schwartz tried to juice up Sun's image with investors,and launched a one-to-four reverse stock split. But neither did much for Sun's shares, which fell 70% in 2008 before the stock-market meltdown accelerated last fall.

Meanwhile, the company gained some more powerful shareholders, including Kohlberg Kravis Roberts & Co., Relational Investors LLC and Southeastern Asset Management Co.

The latter is now Sun's largest stockholder, with more than 20% of its shares, and negotiated the right to designate two Sun board members. A spokeswoman for Southeastern declined to comment Wednesday.

In response to slowing sales, Mr. Schwartz ordered the latest in a series of restructurings last fall, designed to reduce Sun's headcount by 15% to 18%.

Meanwhile, certain Sun investors began pressing board members about six months ago to find a suitor because the company had "a huge cost structure that they don't understand," said one person familiar with the situation. Talks with tentative buyers "intensified this year," this person said.

Besides flirting with Hewlett-Packard Co., Sun officials also approached Dell. IBM was an attractive buyer because "IBM has better controls [and] better management," this person said.