IBM-Sun Deal: History Says Timing Is Right for IBM to Acquire

If IBM does end up acquiring Sun Microsystems (over the weekend, heated talks on the proposed $7 billion deal broke down), history tells us that IBM has a good chance of creating long-term shareholder value and greater returns on its big investment.

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According to a Boston Consulting Group study of 408,076 acquisitions from 1981 through 2008, deals made during an economic downturn are twice as likely to produce long-term returns in excess of 50 percent and, on average, generate 14.5 percent more value for shareholders of the acquirer. (BCG considers a downturn to be a recession or period of slow—less than 3 percent annual—growth.)

“Most companies pull away from the M&A deal table during downturns,” notes the report, “but BCG research has found that it is often ideal to acquire a company during a weak economy.” In that respect, several other cash-rich high-tech vendors—such as Oracle and Cisco—ascribe to BCG’s strategic advice and have made recent acquisitions.

That is, of course, not to say that IBM shouldn’t conduct due diligence on the Sun deal. When acquirers give short shrift to scrutinizing its target’s back-office IT systems, for instance, M&As become even riskier than inherently they already are. That’s one reason why many blockbuster deals never return the expected value for acquirers.

In this case, it appears IBM has done plenty of examination of Sun’s books: IBM has reportedly conducted its due diligence of Sun and found nothing that would prevent it from buying the vendor, according The Wall Street Journal. An article in The New York Times notes that IBM had more than 100 lawyers conducting due-diligence research on potential problems of the acquisition, “ranging from antitrust concerns to Sun’s contracts with employees and IBM competitors.”

The key to success for potential buyers such as IBM, the BCG report says, is focusing on the right types of companies to acquire: typically those “with strong finances and relatively weak profitability.” In Sun’s case, the company has been struggling: Its stock hovered around $6.50 on Monday (an amount nearly $3 less than IBM’s reported latest acquisition offer of $9.40 a share, which Sun’s board reportedly rejected.) In the Times article, one investment bank analyst says that “Sun is now sort of damaged goods.”

Interestingly, the BCG study showed that IBM could have better odds of deal success if it acquired just one part of Sun’s business rather than the entire company. On average, 57.5 percent of buyers of divested assets generated positive returns, compared with 41.7 percent of buyers of entire companies, states the BCG report. (Neither IBM or Sun has publicly confirmed the deal negotiations.)

One big risk here may be not numerical but quite human. At a time when clear-headed thinking is needed by IBM and Sun deal-makers, the Times article notes that, according to one unnamed source involved in the deal, “There’s lots of testosterone going back and forth.”