After IBM, What Now for Sun?

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For IBM's part, it was concerned that some of Sun's partnerships carried with them terms with which IBM was uncomfortable. The sources would not provide details, but it's possible the concerns centered on Sun's close relationship with Oracle. The software maker is a fierce competitor with IBM in the database market.

IBM's Soaring Stock

On Apr. 4, after the two sides reached an impasse on price and other considerations, Sun's negotiators terminated their exclusivity agreement, opening the company up to talks with other potential acquirers. IBM then broke off the negotiations, the sources said.

The breakup is far more meaningful to Sun than it is to IBM. Sun is mired in financial trouble—losing nearly $1.9 billion in its last two quarters as demand plummeted for its high-end servers. The company has fired 2,800 employees so far this year in budget-cutting moves. IBM, on the other hand, is one of the strongest players in the corporate computing business, showing a profit gain in the fourth quarter in spite of a 6% revenue contraction. IBM's stock has soared by 21% so far this year, while the stock price of its main rival, HP, has declined by 6%. Still, the Sun deal would have bolstered IBM's position in the high end of corporate computing and in the nascent market for so-called cloud computing services.

If Sun can't find a merger partner or turn itself around, it could mean a downward spiral for one of the mainstays of the computer industry. Sun was formed in 1982 when a trio of Stanford University graduate students collaborated to build a revolutionary desktop engineering computer. Since then, the company has been at the front of one advance in information technology after another, including Web technologies such as its Java programming language. Its executives understood the importance of the Internet early, coining the motto "The network is the computer." During the dot-com boom, Sun's server computers became standard equipment for Web sites such as Yahoo (YHOO) and Amazon.com (AMZN). But after the bust Sun was buffeted by the rise of the Linux open-source operating system and computers using less-expensive processor chips from Intel and AMD.

Other formerly great computer companies, including Digital Equipment Corp. and Compaq, were acquired and lived on within other companies. The fate of Sun now hangs in the balance.

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Hamm is a senior writer for BusinessWeek in New York and author of the Globespotting blog.