IBM-Sun deal might leave Fujitsu sulking

TOKYO (Reuters) - The prospect of IBM (IBM.N) purchasing loss-making Sun Microsystems (JAVA.O) might be good for Sun's long-suffering shareholders but it could be bad news for a partner across the Pacific: Fujitsu Ltd (6702.T).

Fujitsu, Japan's biggest computer server vendor, but still a small global player, partners Sun in high-end servers and processors through which Fujitsu generates several hundreds of millions of dollars in annual sales.

Since the SPARC computer franchise of Sun and Fujitsu competes with IBM's own range of Power-class servers, mainframes and supercomputers, IBM and Sun's likely alliance is expected to complicate the partnership and, in the worst case for Fujitsu, end it.

"If that partnership dissolves, it will affect Fujitsu's ability to push out its next processor post-SPARC," said Hiroyuki Tsuzuki, an analyst at research firm IDC.

He said Fujitsu would have to either shift its focus to other platforms or spend a lot of money to develop new processors on its own.

Analysts said any loss in the server market could hurt Fujitsu, whose technology solution division including servers, is expected to be its only profitable business unit this year out of its three main segments.

The electronic conglomerate's other divisions such as consumer PCs, mobile phones and semiconductors are struggling due to a slump in demand and tumbling prices, hurt by the deepening economic recession.

Sources have said IBM is in talks to buy Sun Microsystems. The Wall Street Journal said a deal could be worth $6.5 billion to $8 billion. The merged company would hold 65 percent of the $17 billion market for Unix servers.

With Cisco Systems (CSCO.O) also entering the server market, pressure has risen for firms such as Fujitsu to step up their offerings or acquire niche technologies to expand into new markets.

Sources from Fujitsu say the firm is financially not strong enough to face off against IBM and launch a competing bid for Sun.

The Japanese firm has cash and cash equivalent of nearly $5 billion, while IBM has $12.7 billion in cash, according to recent financial statements. Sun had a market value of $6 billion as of Thursday.

IBM, Hewlett-Packard (HPQ.N), and Dell (DELL.O) control nearly three-fourths of the global server market, whereas Sun and Fujitsu hold about 10 percent and 5 percent, respectively, according to IDC. Fujitsu has a quarter of the share in Japan.

GAME OVER FOR HARDWARE?

Fujitsu's shares have risen about 25 percent in the last few weeks, buoyed by gains in global markets, but the stock is JPMorgan Securities analyst Yoshiharu Izumi said a potential loss of the alliance with Sun may not force Fujitsu to alter its business strategy because it is already focusing on expanding services rather than hardware sales.

"The game's pretty much done for hardware," he said. "With or without this (IBM-Sun deal), it is already hard for them to expand services by just increasing hardware sales."

Fujitsu's strategy has been to focus on providing long-term, comprehensive services, including hardware and maintenance, to corporate clients.

But if Fujitsu, as well as other Japanese server makers such as NEC (6701.T) and Hitachi (6501.T), want to compete better globally, it might have to consider its own acquisitions to gain in size, Deutsche Securities analyst Takeo Miyamoto said.

"There is too big of a gap between the top three and the Japanese makers, and the (IBM-Sun) deal would even make the gap bigger," he said. "They would have to seek larger size ... their options include buying smaller players."

($1=97.63 Yen)

(Additional reporting by Mayumi Negishi in TOKYO and Michael Flaherty in HONG KONG; Editing by Anshuman Daga)