Acquisition of Sun: All Win Win for IBM

The acquisition of Sun Microsystems by IBM, the talks are in progress, would help IBM in more than one way. At one end, this acquisition would fetch huge benefits for IBM’s services and software businesses, the core business areas of IBM, and on the other hand it would boost IBM hardware revenues and profitability. However the benefits in hardware sector is likely to be dwarfed by the supposed gigantic growth in services and software business.

IBM is best known as a software and services company with a computer hardware division. It is also manifested in its 2008 revenue structure. Last year 79% of IBM’s revenue were generated from services and software, which was 82% of its pre-tax income, while hardware represented only 19% of revenue and 9% of pre-tax income. Therefore this deal will strengthen IBM’s core business area along with the hardware business. The deal is likely to give IBM a major chunk of the high-end server and storage hardware markets and enhanced access to certain customers, particularly in the telecommunications industries and financial services.

Java will be the key acquisition for IBM
Apart from the hardware business, Sun possesses some strategic software asset, as the likes of the Solaris operating system, Java programming language, and several open source technologies, including the MySQL database management suite. All of them except Java will hardly make any significant contributions to IBM’s software or services revenue.

Almost all major middle-ware and enterprise application vendor has built many important applications using Java and they plan to build more further. Most big corporations rely on Java for some part of their core business processes. Despite all this importance and value, Sun has really struggled to turn Java into revenue and profit as it earned only $200M from Java, an increment of mere 0.5% from the year before. Unlike Sun, IBM is in excellent position to monetize that asset. Java would help the company create a competitive advantage over some of its largest services and software competitors.

IBM’s software & services business likely to see spur growth
Java has been integrated in IBM’s all software and services business. It has been a leading provider of Java-related software and services and earns billions of dollars. The websphere business, that has been one of the pillars of IBM software group’s fast growth over the last decade, is based on Java. Other main IBM’s services businesses, including service-oriented architecture practices, and parts of its SAP and Oracle applications practices have also been tied to Java. In simple words, by owning and guiding Java, IBM would have a genuine claim as being the best place to provide Java software and services.

The problem with Sun is that it lacks the channels to sell its Java expertise and software, while IBM already covers the Java market. In such situations, owning Java could enhance its win rate in this massive market and draw billions in additional revenue and profits.

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