The big IBM-Sun news has come and gone; so far without an outcome.Â It’s going to be ugly for Sun.Â A situation like this is absolutely fatal to an organization.Â The wheels of employee defection and revised customer spending plans are set in motion and there is little that can be done to stop them.Â Sun senior management and the board probably have no idea how much has already happened in the last two weeks.Â So whether they understand the urgency to find a solution for shareholders is an open question.
Right after the IBM-Sun deal fell through the speculation turned to Red Hat.Â The reason is that we are in a perfect time for open source companies and solutions.Â Budgets and spending are under huge pressure and all the growth seems to be at lower price points.Â The netbook craze is a good example of this.Â There are designs out there that promise formidable performance with HD video and high end graphics at “stupidly cheap prices” according to eager customers.Â Â This has become a motif in many areas of technology adoption and growth.
What is very valuable in this market at Sun is the MySQL database which has become the standard for many web-based applications.Â Java has also become the standard for most distributed enterprise applications.Â Finally the OpenOffice productivity tools have been a disappointment so far in terms of market penetration but in the hands of IBM they could certainly do some more damage to franchises like Microsoft Office.Â (Google and Apple are nipping away there already.) At $6.56 Sun has a market cap of $6.3B but a TEV of $4.9B.Â At a TEV/Revenue of 0.4x the company seems hard to resist.Â Our guess was that IBM had room to sweeten their offer to do the Sun deal but we were wrong.Â (Perhaps not surprisingly since we skipped our regular golf game with Sam Palmisano last weekend.)
It’s not Linux itself that is interesting but these open source products on top of it that can deliver quite a bit of business value at very low cost.Â Red Hat purchased JBoss which was a very hot open source application server in the past and could be useful.Â IBM already has a full suite of middleware so our guess would be that a Red Hat solution would be aimed more at the SMB market to drive money away from the pockets of Microsoft than being used to drive deeper into enterprise software infrastructure.Â Â Â You never know though.Â Red Hat has been trying to add features on the OS to bring about virtualization and management capabilities.Â Â Â As of yet their efforts haven’t made much of a ripple in the enterprise market but again in the hands of IBM, maybe they could be more credible.Â (Right now VMware continues to be a clear #1 with no viable #2.)Â Red Hat is trading with market cap of $3.6B and a TEV of $2.9B or about 4.4x revenues.
Citrix purchased open source virtualization company Xen some time ago for about $500M.Â Like Red Hat they haven’t gained much ground on VMW but are incorporating it into some of their own application and desktop virtualization solutions.Â The issue often is service and support if a #2 to VMW is going to be considered.Â In most cases it’s not worth the risk.Â (The Microsoft solution will be used in Microsoft environments but that’s another story.)Â Citrix does have one other aspect that IBM might like uniquely.Â They have the #2 position behind WebEx for online meetings. IBM has their own service that is part of Lotus but it’s a distant runner in the race. Now that Cisco is tweaking IBM in the server space it might be fun to do some of it back with the Citrix GoToMeeting family of products.Â Citrix has a market cap of $4.5B but a TEV of $3.8B or about 2.4x total revenue.
Scraping the bottom of the barrel is Novell, as usual.Â Maybe it’s been a loser too long to be taken seriously any more.Â And any purchase of the company might come with a stigma of paying up for something that is already dead.Â We’d have to take a closer look at Novell to get a better sense of their software assets but all we can say now is that the company is cheap. I’s on a TEV/Revenue of 0.5x and a bit over 3x tangible book.
Looking over the list it certainly appears that Sun stands out as the bargain.Â Their software assets are far more strategic, they have a cadre of top-notch engineers and the marketing, sales, distribution and management team can be reduced drastically to improve profits and company performance.
That JAVA has not declined back (or below) the $5 price where the IBM-Sun news started suggests that many agree Sun looks too tempting not to pick up in this economic environment.Â But the most logical (IBM, HPQ) would have anti-trust issues.Â Cisco would be a real spoiler and game changer for IBM and HPQ were they to decide to do it.Â Dell is saddled with too many of their own problems.Â Some have mentioned Oracle and Microsoft.Â Seeing either of those firms get into the hardware business in a big way is hard to picture.
If the Sun board doesn’t see a transaction in the wings they need to bring an a new CEO if there is any hope to transform the company into an worthwhile equity investment.Â JAVA will be a great trading vehicle for some but a dangerous stock for most.
[Disclosure: Research 2.0 has no position in JAVA at the time of this writing.Â See our website for more disclosures.]