Have IBM's buyout talks with Sun stalled on price?

IBM's $7 billion offer not enough for Sun Microsystems, according to reports.

IBM's talks to acquire Sun Microsystems reportedly broke down yesterday, after Sun rejected a $7 billion (4.7 billion) offer, a source with knowledge of the matter said.

The collapse of negotiations, if final, is likely to hurt Sun's shares as a buyout was seen as a means of survival for the once-storied Silicon Valley company, which has been losing market share. A deal would also have helped IBM compete more effectively against rivals such as HP.

The source, who was not authorised to speak publicly about the matter, said Sun was unhappy with IBM's offer of $9.40 per share or below, and that it was unclear if talks would resume.

The bid represented a premium of up to 89 per cent on Sun's shares before deal talks were first reported last month.

"Sun is now sort of damaged goods," said Peter Falvey, a technology banker at Revolution Partners. "If IBM got under the covers and didn't like what they saw, then what does that mean for other potential buyers?"

An IBM spokesman declined to comment, while Sun officials did not return calls.

Sources told Reuters last month that IBM was in exclusive talks to buy Sun and had proceeded to the due diligence stage. One source had said on Saturday that IBM lowered its offer price for Sun to $9.50 a share from $9.55 a share and that a deal may be announced this week.

Sun shares had risen to $8.49 on Friday, from $4.97 on March 17, a day before talks between the two technology companies were first reported.

That said, Tim Ghriskey, chief investment officer for Solaris Investment Management, said the latest developments could be part of negotiating tactics and that Sun is still likely to strike a deal at around $9.40 a share and that IBM was still the most likely buyer.

"Like any acquisition candidate they are trying to force the highest bid possible," Ghriskey said. "IBM doesn't necessarily need these assets. But I think they could probably benefit from them at a reasonable price."

Click here to read how a tie-up between IBM and Sun could change the industry.

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