Annex Bulletin 2007-30                             August 16, 2007

An OPEN CLIENT edition


Sun's Solaris to Shine on IBM's Polaris (IBM to offer Suns OS on its hardware)

The Greening of Big Blue, Part 2 (IBM to save $250M in mainframe consolidation)

                INDUSTRY TRENDS            

Updated 8/16/07, 11:40AM PDT, adds executive quotes...

IBM to Offer Sun's Operating System on Its Mainframes, System x Servers

Sun's Solaris to Shine on IBM's Polaris

Potential Boost to Mainframe Demand, Sun's Software Revenues?  More Than Meets the Eye?

SCOTTSDALE, Aug 16, 2007 - It started with Java in the 1990s.  And now, Sun has begun casting an ever longer shadow on the IT industry, striking first a deal wiIBM_green_leaf.JPG (92199 bytes)th Google and now with IBM, too.  The two companies announced today that Sun's Solaris (operating system) will also shine on Big Blue's increasingly "greener" Polaris mainframes (System z).  Solaris will also become the X-factor on IBM's Intel-based server farms (System x).

The deal appears good for Sun and even better for IBM.  Sun will get additional software revenues.  IBM will gain because the Solaris ecosystem will help boost the already strong demand for IBM mainframes and the System x.

"The relationship we have with IBM is really the strongest we have with any (IT) player in the marketplace"

Jonathan Schwartz, Sun's CEO

"We're thrilled to be working with IBM to bring the Solaris OS to the broadest market possible - they are a natural partner for Sun," said Jonathan Schwartz, president and CEO of Sun Microsystems.  "This relationship represents a tectonic shift in (Sun's approach to) the marketplace," Schwartz added in today's press conference.

Schwartz said that Sun has been on a journey for several years now to separate Solaris from its hardware business.  With this IBM deal, Big Blue now becomes Sun's first Tier-1 distributor for Solaris.

The Solaris 10 OS, for example, has the largest installed base of any UNIX or Linux OS, Sun boasts at its webs site, including an application catalog of over 4,000 unique titles from more than 2,000 independent software vendors (see Sun release, Jan 2007).  Sun has sold about 10 million Solaris licenses in the last two years alone.  And now, IBM will get a chance to cherry-pick the most promising among the ubiquitous Solaris users to try to get them to migrate to its already thriving mainframe and Intel hardware platforms.

"Solaris is a wonderful addition to what we already have," said Bill Zeitler, senior vice president in charge of all IBM hardware.  "(This deal) shows commitment to offer our clients a choice.  Our differentiator is choice."

And what's in it for Sun?  More business; bigger revenues, its CEO believes.  "Once we separated our software and hardware businesses we've sold more of both," said Schwartz answering an analyst question.  "We've seen the days of tying the hardware and software, and it just doesn't work (anymore)," he added.

According to David Boyes, the head of Sine Nomine, a company that helped IBM port Linux to the System z, the Solaris move would help reassure (Sun's) StorageTek customers of continued mainframe commitment by Sun, and shore-up Sun's lost ground in the last four years with Solaris deployments in large enterprises (click here for Boyes' presentation on this).

More Than Meets the Eye? Should IBM Acquire Sun?

And what about the Unix competition?  There has been no mention of Solaris on System p or Unix in the release.  Would today's deal not diminish the opportunity for Sun new server sales?  Possibly.  So why would Sun do it?  We don't know for sure.  Maybe the Polaris revenue boost is enough?  Or maybe there is more to come?  Like porting Solaris to the System p.  We think that would make sense for both companies.

"That's certainly something I would like to see happen," said IBM's Zeitler, answering a question during the press conference.

Sun's Schwartz did not disagree.  "The relationship we have with IBM is really the strongest we have with any (IT) player in the marketplace," he said.  He added that he  and Bill (Zeitler) both hoped that it would open doors to "maximum market opportunities."  And that may include a Unix deal, too.

A soup-to-nuts IBM-Sun partnership could end up being a better deal for both - whether IBM acquires Sun, or enters into some sort of a joint venture deal that would eliminate the Unix competition between the two hardware platforms.  Sun would then be able to save a ton of development money that's been going into the hardware competition with IBM.  And IBM would gain huge influence on the industry, especially at the low end, where it is weak.

And if IBM were to buy Sun, how much would such an acquisition cost?  Probably about $24 billion, assuming a (hefty) 50% premium over the current market cap at just over $16 billion.  The $6.9 share price (50% premium) would actually be only slightly above the 52-week high that Sun's shares reached in January (see above charts).  So it's not like the would-be buyer would be grossly overpaying for the company.

By the way, we first talked about Sun as a potential takeover target over four years ago (see Let the M&A Games Begin, Annex Bulletin 2003-20, June 2003).  Its price back then was just a tad higher than it is today.

Given IBM's improving and Sun's declining market fortunes, such a deal would probably boost both stocks.  All IBM would need to do is stop throwing tens of billions of dollars in stock buybacks for a while, and voila... Big Blue would own a software company "par excellence."

A software company?  Yes.  Sure, Sun has servers and designs chips; good chips at that (see below).  But somebody else always manufactures them (Fujitsu, Texas Instruments in the past).  So why not IBM?

Furthermore, we have been saying for years that Sun's real "crown jewel" is its software, not its hardware:

"It took innovation mixed with hucksterism to accomplish Sun's Java marketing feat.  'Interest in Java had a 'halo effect' on Sun,' the Investors Business Daily noted in a February 1997 report... It would not be an exaggeration to suggest that, in terms of perceptions, Sun's has now replaced Apple as the IT industry's innovation foundry in most people's minds.  Which has undoubtedly indirectly bolstered Sun's other businesses."

(An excerpt from "Coffee Beans & Sun Spots," Annex Bulletin 98-33, Aug 1998)

That was nine years ago.  And just yesterday, in a clear challenge to Microsoft's popular Office software, Sun announced that Google has begun distributing its StarOffice suite of word processing, spreadsheet and other workplace-oriented programs for free, as part of the Google Pack download.

Sun Googling for Microsoft

By adding Sun's software, Google is giving a valuable endorsement to a server and software maker that has struggled to return to sustained profitability ever since.  Just how ubiquitous Sun's software already is can be seen from the fact that its OpenOffice suite has been downloaded about 100 million times.

In reciprocal move, Sun has also added Google search capabilities to all of its StarOffice products.  That will allow users to run online Google searches right out of their word processing documents.

"It's a paradigm shift," Sun's executive vice president in charge of software, Rich Green, told the AP in an Aug 15 interview. "It brings together office productivity, networking and search into one offering."

The initial partnership between the Silicon Valley neighbors (Sun and Google) was originally announced in October 2005.

Still Chipping at Hardware

Despite its obvious software prowess, and unimpressive hardware results, Sun continued to chip at its processor business.  Only last week (Aug 7), the company announced a chip that is very good at executing multiple "threads," sequences of programming instructions carried out simultaneously.  Sun's new chip, formally called UltraSparc T2 (also known by the code name Niagara 2), can execute as many as 64 at once.

Sun's CEO Schwartz predicted Niagara 2 will jump-start sales of Sun-designed chips to companies, including makers of such varied products as networking devices, TV set-top boxes and cars.

"It's great to have the fastest microprocessor on earth," he reportedly told the Wall Street Journal (Aug 7).

Well, that's a stretch.  IBM's new Power6 chip, with a record-setting clock speed of 4.7 gigahertz, really deserves the title of the world's fastest microprocessor (see "IBM's First 'Green' Chip," May 21).  So Sun could save itself a lot of trouble and expense if it were to join forces with IBM.  Remember the old adage, "if you can't beat them, join them?"

Sun says its operating system, Solaris, is good at breaking tasks into threads, as is other Sun software based on its Java programming language.  And now that Big Blue can offer it on its hardware platforms, that means it will be also good for IBM from now on.

Happy bargain hunting!

Bob Djurdjevic

Click here for PDF (print) version

For additional Annex Research reports, check out... Annex Bulletin Index 2007 (including all prior years' indexes)

Or just click on SEARCH and use "company or topic name" keywords.

Volume XXIII, Annex Bulletin 2007-30
August 16, 2007

Bob Djurdjevic, Editor
(c) Copyright 2007 by Annex Research, Inc. All rights reserved.

8183 E Mountain Spring Rd, Scottsdale, Arizona 85255
Tel/Fax: +1-602-824-8111

The copyright-protected information contained in the ANNEX BULLETINS is part of the Comprehensive Market Service (CMS).  It is intended for the exclusive use by those who have contracted for the entire CMS service.

Home | Headlines | Annex Bulletins | Index 1993-2007 | Special Reports | About Founder | SearchFeedbackClips | Activism | Client quotes | Speeches | Columns | Subscribe 

Also check out...

IBM Beats the Street (Analysis of IBM 2Q07 business results)

Adios, Microsoft Vista! (How I Failed Twice in Trying to Scale Mt. Vista)

Burning the Track - Firing on all cylinders, Accenture raises forecast  [Annex clients click here]

New Broom Sweeps Clean - Analysis of CSC's 4Q07 business results [Annex clients click here]

The Last of the (PC) Mohicans - Analysis of Dell's strategy changes; Linux, Wal-Mart

BRIC by BRIC... to Top Line Growth - Echoes from IBM meeting for fin analysts [Annex clients click here]

Per Ardua Ad Astra - Analysis of HP's 2Q07 business results [Annex clients click here] 

The Greening of Big Blue - IBM to spend $1 billion on "going green"

Are We in "Buyback Bubble?" - Analysis of corporate stock buyback trends

IBM: Lowering Center of Gravity - Highlights of Partnerworld 2007, with Detailed Reports for clients

Growth Accelerating - Analysis of Capgemini's 1Q07 business results [Annex clients click here]  

To Buy (back shares) or Not to Buy? - Analysis of stock buybacks in corporate America

No Surprises in Good Opening Quarter - Analysis of IBM 1Q business results [Annex clients click here]

IBM Stock Still Grossly Undervalued (A preview of IBM first quarter business results]

Accenture Beats Forecasts, Again (Analysis of Accenture's 2QFY07 results)

HPS, Capgemini Tie for "Gold" - Results of Octathlon 2007 [Annex clients click here]

The Value of pi (π) - Analysis of IBM System p and System i market and product strategies

IBM Profit to Grow Faster Than Revenue - Update to 5-yr IBM forecast [Annex clients click here]

The (T)ides of March Sink Markets Again - Analysis of global economic & investment trends

IGS: Growth Slows, Profit Surges - Analysis of IGS 2006 business results [Annex clients click here]  

HP: Toward New Highs? (Excerpts from analysis of HP's 1Q07 business results) [Annex clients click here]

Capgemini Caps Great Year, Saves Best for Last (Analysis of Capgemini's fourth quarter business results)

EDS: On Sunny Side of Street  (Analysis of EDS' fourth quarter business results)

CSC: Where Less Seems More (Analysis of CSC's third quarter fiscal 2007 business results)

Fujitsu: Sales Up, Profit Down (Analysis of Fujitsu's third quarter fiscal 2007 business results)

IBM Shatters Records (Analysis of IBM's fourth quarter business results)

IBM Stock Passes Century Mark (Analysis of Big Blue's Stock Performance)

Happy Days Are Here Again (Analysis of Top 20 IT leaders' latest stock market and business performances)

"Excellenture" Excels Again (Analysis of Accenture's first quarter fiscal 2007 business results) [Annex clients click here]

Hedging the Bets (Analysis of latest institutional shareholdings of leading IT companies: IBM, HP, Accenture, EDS, CSC, BearingPoint, ACS, Perot ) [Annex clients click here]

Globalization Accelerates (Analysis of United Nation's annual survey of global investments)  

IBM: A $125-Stock? (An update to "From Small Acorns Mighty Oaks Grow")

Capgemini: Longest Sustained Stock Price Rise (An update to "By Leaps and Bounds")

HP: New King of the Hill (Analysis of HP's fourth quarter business results)

IBM: From Little Acorns Mighty Oaks Grow (Analysis of IBM's "State of the Union")

Capgemini: By Leaps and Bounds (Analysis of Capgemini's preliminary third quarter business results) 

Fujitsu: Good Performance Gets Better, More Global (Analysis of Fujitsu's first half FY2007 business results)

IBM: A Slam Dunk Quarter (Analysis of IBM third quarter business results)

Accenture's Emphatic Year-end Accents (Analysis of Accenture's fourth quarter results) [Annex clients click here]

IBM: Services in a Box (Analysis of IBM Global Services' Ground-shifting Announcements)

Strong Comeback by IT Stocks in Third Quarter (Analysis of top 20 IT companies' market and business trends)

Stock Buybacks: A Fading Fad (Dell, erstwhile "King of Fluff," suspends its stock buybacks)

Capgemini: Growth Continues (Revenues, net profit up in double digits, margins also improve)

HP Firing on All Cylinders (Stock sets new multi-year record following excellent third fiscal quarter results) [Annex clients click here]

Power of Manpower (While others move to India, Russia... AMD invests in New York, hailing "phenomenal" quality of its labor force)

Ebb Tide Lowers Most Boats (Analysis of EDS' and CSC's latest quarterly results)

IBM Stock Grossly Undervalued? (Analysis of stock market valuations of IBM and its major competitors) [adds latest Fujitsu, Capgemini results]

IBM vs. HP: A Tale of Two Blues (Both companies are doing well in business, but only HP is favored by Wall Street; Big Blue trying to change that now with its new "India Opus") [Annex clients click here]

Go East, Young Man! (A speech delivered in St. Petersburg, Russia, May 25, 2006; click here for slides)

IBM 5-Yr Forecast: Steady As She Goes (Emphasis on quality continued) [Annex clients click here]

Octathlon 2006: Accenture Again Wins "Gold!" (HP gets "Silver," IBM "bronze") [Annex clients click here]