Sun Micro shares soar 79% on reports of IBM talks

SAN FRANCISCO -- IBM ibm is in preliminary talks to acquire Sun Microsystems java in a blockbuster deal that could reshape the tech industry, according to two people familiar with the matter.

IBM would pay at least $6.5 billion in cash — the largest acquisition in its 98-year history — and a deal could be struck as early as this week, according to the sources. They declined to be named because they are not authorized to speak publicly about the talks.

The merger talks are extremely fluid, and the deal could fall through, the sources say. The talks were first reported by The Wall Street Journal and confirmed to USA TODAY.

News of the merger talks sent Sun shares soaring 79%, to $8.89, in trading Wednesday. IBM shares slid 1%, to $91.95.

IBM and Sun declined to comment.

The move could usher in an era of consolidation and partnerships in tech as IBM, Hewlett-Packard and Cisco Systems compete to supply high-end computers that power complex corporate networks and transactions. On Monday, Cisco plunged into the computer-server market, pitting it against sometimes business partners HP and IBM.

An IBM-Sun deal makes sense for both companies, analysts and resellers say, despite some overlap in products and services. Sun's computer servers and high-end systems complement IBM's software and services, and Sun's traditional customer bases in financial services, telecommunications and the public sector are "highly desirable," says Charles King, principal analyst at market researcher Pund-IT. Sun could especially help IBM as it expands in digitizing key pieces of infrastructure, from "smart" electric utilities to water supplies.

IBM's Global Services group has, meanwhile, been one of the largest resellers of Sun systems.

"It is a big deal," says John Sheaffer, CEO of Sysix, a $100 million reseller of IBM and Sun hardware and software products. But Sun customers will be concerned "about what happens to their existing products if IBM takes over." Such a pairing would combine companies headed in different directions.

Sun, a darling of the dot-com era, has struggled since the Internet bubble burst in 2000. Since then, it has slashed thousands of jobs, hemorrhaged money and focused on open-source software.

IBM has rebounded from a major restructuring in the 1990s, snapping up more than 100 companies since 2000, selling its PC business and other low-margin hardware businesses, and steadily increasing R&D investments to $6.3 billion annually.

A $6.5 billion deal represents a significant premium for Sun, which closed trading Tuesday with a market value of less than $4 billion. Sun has more than $2.6 billion in cash and securities, according to its last quarterly report.