IBM’s Continued Path Of Expansion

On Wednesday, shareholders of Sun Microsystems (JAVA) saw their investment surge more than 75% as reports surfaced that the company is in talks to potentially be acquired by International Business Machines (IBM). Shares of IBM moved up 2.8% on the news.

The purchase is likely to cost IBM at least $6.5 billion and could happen as early as this week if the company’s talks are successful. Such a deal has the potential to be IBM’s largest single acquisition; eclipsing its $4.9 billion purchase of Cognos last year.

Despite the fact that Sun is coming off of a second-quarter loss $209 million, this acquisition would make sense for IBM in the long-run. In recent years, the company has been buying up software companies and moving out of hardware. In 2005, IBM sold off its personal computer business to China-based Lenovo Group (LNVGY.PK) for $1.25 billion. This deal would allow IBM to rebuild its hardware portfolio. It would also be welcomed by Sun Microsystems (JAVA) as the firm has been seeking a buyer in recent months, but was reportedly turned away by Hewlett-Packard (HPQ).

The timing of this move by IBM appears to be ideal as well. The company has been one of the more resilient components of the Dow throughout the market downturn. IBM is only trading 16.3% below its level from a year ago, yet the Dow has fallen more than 36.2% during the same time period. Sun shares have been battered to the tune of more than 50% over the course of the past 52 weeks, which makes this potential purchase all the more attractive and feasible.

Should this transaction ultimately occur, IBM will be throwing down the gauntlet to Cisco Systems (CSCO) in the server business. Last week, the networking behemoth, announced its plans to break into the $55 billion server market with the unveiling of its Unified Computing System. However, a Sun/IBM combination would allow IBM to answer this challenge with a splash as well as augment its position as the market leader in the server market. Statistics from the research firm IDC show that IBM had 31.4% of the server maker market last year. Following IBM was Hewlett-Packard (HPQ) with 29.5%, DELL (DELL) at 11.6% and Sun with 10.6%.

As far as potential trades go, the horse is already out of the barn with respect to Sun. Taking a long position on Sun would only prove risky at this point should the deal fall apart. The potential long-term growth that IBM could capture out of this deal makes its shares worth another look though.

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