IBM’s talks to acquire smaller computer and software rival Sun Microsystems Inc broke down on Sunday after Sun rejected IBM’s $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 Hewlett-Packard Co .

The source, who was not authorized to speak publicly about the matter, said Sun was unhappy with International Business Machines Corp’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% 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. The Wall Street Journal had previously said IBM’s original bid was $10-$11 a share.

The collapsed talks are expected to damage the smaller Sun more than IBM, the world’s largest technology services provider, which has fared relatively well despite the global economic slump thanks to its outsourcing business and its shift from hardware to higher-margin software sales.

Kaufman Brothers analyst Shaw Wu said it was a mistake for Sun to reject the bid, citing the leap in Sun shares since reports of the deal talks.

“The acquisition is already factored into the market’s thinking. To reject it over 50 cents a share, or whatever it may be, doesn’t seem like a very prudent move,” Wu said.

Sun posted an 11% decline in quarterly revenue for its fiscal quarter ended Dec. 28, while gross margins shrank to 41.9% from 48.5% from a year earlier.

The company rose to prominence selling high-end computer servers in the 1990s but never fully recovered from the dotcom bubble burst earlier this decade. Analysts also say it has failed to fully capitalize on its software assets including Solaris and Java.

Some analysts have thought from the start that a deal between Sun and IBM could prove difficult, particularly due to the likelihood of intense antitrust scrutiny.

The merger would give the combined company 65% of the $17 billion high-end Unix server market, according to market researcher IDC.

Failed negotiations with IBM could mean that Sun will need to look for another buyer, and contend with a lower offer. But no bidder other than IBM has emerged in the months that Sun has been shopping itself.

The Wall Street Journal reported that Sun had demanded assurances from IBM that it would proceed with the deal in the face of regulatory challenges, fearing IBM’s offer left too much room for it to walk away.

While a deal was widely seen as more crucial for Sun than for IBM, many analysts had also said it would help IBM if the company is able to cut costs and make better use of Sun’s assets.

IBM shares have also risen 10% since the negotiations were first reported, helped by an upswing in the overall market.

Tim Ghriskey, chief investment officer for Solaris Investment Management, which manages about $2 billion, 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.”

Buying Sun would hand IBM a clear lead at the high end of the $45 billion overall server market fought over with Hewlett-Packard.

It would also broaden IBM’s software portfolio, add storage products that vie with EMC Corp and Network Appliance Inc.

Analysts have said Sun’s software could also help IBM compete with Microsoft Corp (MSFT, Fortune 500), as well as Cisco Systems Inc (CSCO, Fortune 500), which some see as IBM’s biggest rival in the long term.

Both Cisco and IBM have been expanding beyond their traditional products to new technologies like “cloud computing,” in which companies store data and computing power in remote data centers accessed over the Internet, rather than buy their own computer equipment. – Reuters

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CNN reported a lengthy report on the impact of GM or Chrysler going bankrupt in US which does not necessary mean straight forward solution to the auto industry problem.

In Detroit, the unthinkable — an automaker bankruptcy — has become very thinkable.

President Obama is giving General Motors 60 days to come up with a more aggressive plan to cut costs and debt. Chrysler is only getting half that time to work out a combination with Italian automaker Fiat. If they fail, the government will force them into bankruptcy court.

On Tuesday, new GM’s  CEO Fritz Henderson said the company might be in bankruptcy even quicker than that if negotiations with creditors and the United Auto Workers union don’t go well.

Americans have grown used to the bankruptcy of airlines, retailers and other businesses. But a bankruptcy of one or more of Detroit’s Big Three could have a much more wide-ranging impact on the U.S. economy. Here’s what a bankruptcy could mean for car owners, dealers, auto workers, suppliers, lenders and U.S. taxpayers.

Consumers

The government has announced it will stand behind the warranties for new GM and Chrysler cars. But that would do little good to somebody trying to sell a model that winds up being discontinued. The loss in resale value could be tremendous.

After GM and Chrysler killed off Oldsmobile and Plymouth, two-year old vehicles of those discontinued brands were worth as much as a similar five-year old model at the companies’ other brands, according to used car price tracker Kelly Blue Book.

And if either company was forced to go out of business due to bankruptcy, it would cost people a lot more to buy a new car. Even with demand for new cars at a 26-year low, a shutdown of all GM or Chrysler plants could soon create a shortage of new cars.

That would allow other automakers to pullback from the record average of $3,169 in cash-back and other incentives now being offered to buyers. Jesse Toprak, industry analyst with sales tracker Edmunds.com, estimates that average incentives could fall by about $1,000 per vehicle within a year or two if GM and Chrysler were forced to halt operations.
Auto Workers

The popular assumption is that bankruptcy would give GM the power to get out of their labor contracts with the United Auto Workers union and other unions that put them at a competitive disadvantage to nonunion automakers such as Toyota Motor (TM). The truth is far more complicated.

Heidi Sorvino, head of the bankruptcy practice in the New York office of law firm Smith, Gambrell & Russell, said it is much tougher for a bankrupt company to shed its labor contracts than other obligations.

Where Wagoner went wrong

The threat of bankruptcy gives management far greater leverage at the negotiating table. But the legal process is cumbersome enough that management at bankrupt companies typically find it quicker to reach a new labor deal than have the court impose one. Bankrupt automaker Delphi took nearly 21 months to reach a new deal with the UAW after its bankruptcy filing.

So while GM might get better contracts in bankruptcy than they would outside of bankruptcy, the 54,000 UAW members would not be at the mercy of whatever the company wanted to impose on them.

John Weykamp, an auto restructuring expert at accounting firm Crowe Horwath said retirees at GM would probably continue to have health care coverage, although the company would likely not have to put as much money into the trust funds that are being set up to pay for that coverage. And he doubts the union would be pushed by management to accept significant pay cuts.
Dealerships

Both companies have announced plans to cut their bloated network of dealerships, which were established when they had a much larger share of the nation’s new car market. But cutting ties with dealers is an expensive process, given the strength of state-by-state dealer franchise laws. GM spent about $1 billion to drop its Oldsmobile brand, most of it to buy out dealers.

Bankruptcy could make it easier for the companies to get out of those dealership agreements, although Sorvino said that dealers would still have the ability to challenge such a move in court.

“It’s not a slam dunk,” she said about using bankruptcy as a tool to get around franchise laws.

But the bigger problem could be finding money for the dealers that stick around. Dealers need financing to buy vehicles they hold in inventory, and it’s not clear whether lenders such as GMAC, now an independent bank holding company, would continue to provide dealers with that crucial financing if GM was bankrupt.

So the government might need to step in to provide that funding for dealers, which in turn could increase the cost to taxpayers of the industry rescue. GMAC has already received $6 billion in government assistance while Chrysler’s financing arm has received $1.5 billion.
Suppliers

GM owed its suppliers $22 billion at the end of 2008. Chrysler reported it owed suppliers about $7 billion .The companies would be able to pay some of the money it owes suppliers, but only those whom the court determines to be “critical vendors.”

The $5 billion federal bailout of the auto parts sector announced in March only helps the suppliers that GM and Chrysler have identified as vital to their continued operations. So many other suppliers would not get the money owed to them.

That means there would be widespread bankruptcies and factory closings across the parts industry, which employs more people than the automakers themselves.

“When a major company like this files, there will definitely be a domino effect,” said Sorvino.
Investors

GM has about $27 billion in unsecured debt. Almost all of it was issued years ago when the company was still making money. Those bonds are now trading at pennies on the dollar. Chrysler has nearly $7 billion in secured debt.

The companies want to get creditors, which include mutual funds, pension funds and individual investors, to accept equity in return for significantly reducing those debt levels. So far, they’ve made little progress in reaching agreements on those swaps.

Bankruptcy would essentially wipe out those current debts. The secured debt holders would be in a better position than the unsecured bondholders. But both would likely have to wait to see what value either company has after emerging from bankruptcy — and what fraction of that value they can recover.

The investors holding the debt would most likely receive stock in the new companies following a bankruptcy reorganization. But if one or both companies do not emerge from bankruptcy, all bondholders would get is the proceeds of the sale of assets that occurs during liquidation.

And then there’s the investors in GM’s stock, which include anybody that owns an S&P 500 index fund. The company’s shares have plunged 90% in the past year and would be essentially worthless if the company went bankrupt. Chrysler, a privately held company, is owned by hedge fund Cerberus Capital Management.
Taxpayers

Bankruptcy would not be the end of the drain on federal dollars. In fact, it could mean an even greater cost to taxpayers.

There is widespread agreement that the companies would need more financing to fund their operations during a bankruptcy than the $21.6 billion they are asking for from the government to stay out of bankruptcy court. GM has estimated that it would need $45 billion in additional federal help for even a quick trip in and out of bankruptcy.

Chrysler didn’t provide such an estimate for a speedy bankruptcy. But if Chrysler can’t reach a deal with Fiat in the next month, many think it would be forced to liquidate since the Treasury Department found it is not viable as a stand-alone company.

Chrysler has estimated it will need $24 billion in federal help over 24 to 30 months to accomplish an orderly shut-down of its operations, in order to limit the shock to the rest of the industry.

But those loans would be only part of the cost to taxpayers of a Chrysler bankruptcy. There would also be an estimated $110 billion in lost tax revenue over the next three years. And it seems safe to say that a bankruptcy could drag out the current recession.

The auto industry’s woes helped shave 1.1% from the nation’s gross domestic product in the fourth quarter. Imagine how much worse of an impact there would be if one or more of the Big Three actually goes out of business. To top of page

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Rick Wagoner, late of General Motors, never saw the axe coming, according to Reuters.

When he arrived at the Treasury Department for a meeting on March 27 with Obama administration’s autos task force, he was a 32-year GM veteran and a chief executive carrying the weight of the company’s wrenching restructuring on his 6-foot-4 frame. Pressure for him to quit last fall when he first approached Washington for a bailout had faded.

But Wagoner’s plan for a GM turnaround and a US$16 billion bailout was rejected in the meeting and the company where he spent his entire professional life fell off his shoulders.

“In the course of that meeting, they requested that I step aside as CEO of GM, and so I have,” Wagoner said in a message posted on the automaker’s Website early March 30.

A majority of GM’s board will also be replaced.

Wagoner stepped into the afternoon air jobless.

He could not be reached Monday for further comment.

Wagoner has become the most-recognizable casualty of a once vaunted industry brought to its knees by a confluence of disastrous circumstances that coincided with the later years of his tenure. Some of the wreckage was out of Detroit’s control, but some of it — as President Barack Obama has said — was self inflicted.

“Yes, we were surprised,” Fritz Henderson, Wagoner’s former top deputy and now his replacement, said of the task force rejection of the company’s plan that he helped construct.

Henderson said emotions for many people in the GM community over Wagoner’s ouster has ranged from shock to sadness to pride.

“He was asked to step aside and he did because he felt that was one of the requirements in order to move forward,” Henderson said in a conference call with reporters.

“I think the organization is quite sad about that but our job is to move forward and get the job done,” Henderson added.

Obama last week cited years of corporate mismanagement as a factor for the U.S. auto industry’s decline. Wagoner presided over GM’s rapid deterioration in the past five years.

While the remark raised few eyebrows and some references were made to the entrenched Wagoner, many industry insiders believed he had begun to mute critics and was moving GM in a new direction.

At the very least, he was not resisting change.

“This is not meant as a condemnation of Mr. Wagoner, who has devoted his life to this company,” Obama said in a speech laying out an restructuring strategy he promises to aggressively pursue.

“It’s a recognition that it will take a new vision and new direction to create the GM of the future,” Obama said.

Lawmakers who spoke with Obama said he was “matter-of-fact” about the decision to seek Wagoner’s resignation.

“The president said he had decided to do that. He wasn’t asking for opinions,” said U.S. Sen Carl Levin, a Michigan democrat. “There wasn’t much point in arguing whether it was fair or unfair, wise or unwise.”

Wagoner’s counterparts at Chrysler, Bob Nardelli, and Ford Motor, Alan Mulally, are relatively new to their jobs and both recruited from other industries.

“We are left to look back and say that Wagoner’s appointment as both chairman and CEO in 2003 was little more than an act to ensure the dynasty of GM boardroom arrogance and failure continued,” said Howard Wheeldon, senior strategist at brokerage BGC Partners.

Wheeldon said Wagoner’s departure had been all but inevitable since the automaker sought government funds. At the time of the company’s US$13.4 billion bailout last fall, Sen Christopher Dodd, chairman of a committee overseeing corporate rescue funds, had publicly called for Wagoner to step down. – Reuters

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