Sun Micro Shares Slide As Concerns Grow Around IBM Deal

NEW YORK -(Dow Jones)- Sun Microsystems Inc. (JAVA) shares hit their lowest point Monday since the news broke last week of a potential acquisition by International Business Machines Corp. (IBM).

The stock's decline, which has been fairly steady since hitting a high of $ 9.27 on Wednesday, reflects Wall Street's concerns that the deal won't get done or not at the premium first suggested.

Both companies declined to comment. The Wall Street Journal reported Friday that the deal was being delayed as IBM completed its due diligence.

Sun Micro shares had rallied after The Wall Street Journal reported that IBM was in talks to purchase the company for $10 to $11 a share, or up to roughly $8 billion. The stock hit a low of $7.25 Monday - down nearly 22% from Wednesday's high - before rising with the broader market late in the session Monday.

Despite the late-day gains, Sun Micro still was one of the few decliners Monday, dropping 3.7% to $7.80.

"Ten or eleven bucks a share looks fine as a sum of the parts, but if you factor in cash and debt, I think it's closer to $8 or $9," said Argus Research analyst Wendy Abramowitz.

A double-digit per-share price would represent more than a 100% premium to what had been Sun's closing price - $4.97 - before the news last week.

Since deal reports surfaced, others have shown skepticism about the price as well. Thomas Weisel analyst Doug Reid said in a client note that a cash bid of approximately $8.50 a share represents a "best-case scenario" takeout valuation for Sun. Bill Shope of Credit Suisse also said last week that he was "surprised by the premium IBM is willing to offer."

There are several reasons why investors might be skeptical. For one, the companies remain mum days after reports of a both a possible deal and a lengthy due-diligence process. Also, few others look prepared to compete with IBM for control of the company, which makes the chances slim for a bidding war and a higher premium.

Additionally, IBM may find it faces significant challenges integrating a company with many disparate businesses, and a culture said to be led by engineers, not executives.

To be sure, IBM has the cash to make a deal happen despite the tight financing environment. As of Dec. 31, IBM had $12.9 billion in cash and cash equivalents, and reported a 12% rise in fourth-quarter profit, bucking the trend of other tech bellwethers suffering from slumping spending.

But as early excitement winds down, so too could Sun's share price. The company has been hit by a drop in demand for its high-end servers. Sun has traditionally relied on purchases from the struggling financial-services sector, which was hit early in the current downturn.

In January, the company reported that it swung to a fiscal second-quarter loss, and Chief Executive Jonathan Schwartz said the economic crisis was causing customers to delay purchases of some of its products. In November, Sun announced plans to cut up to 18% of its work force, or as many as 6,000 employees, in an effort to cut annual costs by some $750 million a year.