Is this the endgame in the current IT industry recession? It looks that way. Both Cisco and Sun Microsystems are angling to shift and refine their product portfolios with an eye on survival. Added spice comes in the form of a possible US$6.5bn takeover of Sun by IBM.

IBM’s approach for Sun Microsystems could be seen as evidence that the market’s recessionary woes are beginning to bottom out. While due diligence is still being carried out, it’s been a remarkably quiet process so far – no fireworks, no aggression, no counter-bids – so it’s been more like a takeover ‘barn dance’ then a takeover ‘battle’.

There are two significant certainties here, however. IBM has deep enough pockets to fund an all-cash offer of this size, and has held the ready cash for many months. It has been able to sit and watch Sun’s value fall by as much as 85% in the last year. Hence, IBM’s decision to strike now suggests a belief that Sun is now somewhere near as low as it can go: IBM’s initial offer was twice Sun’s market value at the time, although Sun’s shares have since rebounded on news of the bid.

Clouds with a golden lining
News of IBM’s interest emerged just as struggling Sun was preparing to announce plans to pin its future more firmly to cloud computing. It duly unveiled the ‘Sun Open Cloud Platform’ on 18 March: the first offerings will be the Sun Cloud Storage Service and the Sun Cloud Compute Service, which pretty much do what it says on the tin.

"Sun's approach to cloud computing blends our expertise in developing open source software and communities with unique design innovation. Sun's Open Cloud Platform is the first step in delivering on our vision of a world that has many clouds that are both open and interoperable," said Dave Douglas, Senior Vice President at Sun’s Cloud Computing Business Unit, which was formed last July.

Sun’s impressive track-record in open source software makes cloud computing a logical next step for the company. How this strategy fits into IBM’s plans is not entirely clear, leading some to observe that the acquisition of Sun is an exercise in financial bravado rather than being driven by a close technology ‘fit’.

Even without IBM’s involvement, Sun’s cloud push can also be read as a sign of the sector turning a corner after recent economic turmoil and woe. As well as opening up a new revenue stream for Sun, the appeal of cloud computing for end users is based on reduced IT costs and overheads. As a strategy it is born in part out of recession while offering the chance to survive and pull away from it, too.

A bridge too far
You can see something similar in Cisco’s announcement that it is moving from its traditional router product heartland and entering the world of servers. Its new ‘Unified Computing System’ (UCS) is effectively a private cloud offering that creates a virtual network including networking, server and storage functions.

As with Sun’s cloud ambitions, Cisco’s move looks like a natural progression in the light of technology evolution and convergence of computing elements as well as the need to diversify away from the router world. Like Sun, Cisco has seen its share price battered, falling by more than 50% since its most recent peak in late 2007. Even so, its market cap still floats at around the US$100bn mark, which suggests that a takeover is out of the question although a big ticket merger may not be. Indeed, Cisco’s ‘previous’ in the acquisition field makes it plausible that it will embark on an aggressive programme of buying up others, not least its partners in the UCS initiative such as VMWare or Red Hat.

Head count, body count
Like Sun, Cisco is using a new strategy in an attempt to revive its fortunes in the short and longer terms. This makes a refreshing change from survival strategies that look no further than another round of job cuts. Speaking of which IBM, cast as the rock-solid moneybags at the top of this article, is set to shed another 5,000 jobs this week on top of the 4,000 jobs cut earlier this year.

This latest instance of blood on the carpet could be taken as evidence that the pain is not yet over. An alternative view is that this no more than a cynical and opportunistic exercise in cost cutting at a time when IBM itself knows that better times are around the corner. That after all, is what its pursuit of Sun seems to imply.
Jim Chalmers