Ashlee Vance has an interesting article on the future prospects for Sun Microsystems now that its market cap is $7.7B.  Sun needs to maintain at least a $10B market cap to remain a potential holding of large cap funds.  If Sun’s market cap slips below $10B for too long, large cap funds holding Sun will have to sell and thereby cause a further drop in Sun’s market cap.  With short interest growing from 25 million shares to 57 million shares over the past month, compared to a 3 months trading volume of 17 million, the sharks are definitely circling.

On the other hand, Sun has over $2.5B of cash on hand which should allow them to ride out the storm.  This is especially true when you consider free cash flow has ranged from $137 million to $467 million over the past year.  (i.e. Sun is making more from operations than they are spending, so they won’t burn through the $2.5B in cash just yet.)

Ashlee suggests that Fujitsu would be a good candidate to merge with Sun.  I wouldn’t have considered Fujitsu. But Ashlee makes great points about the R&D culture of Fujitsu & worldwide reach and customer preference of the combined company.

But what about the other leading IT players?  Would any of them make a move for Sun?

  • IBM? Unlikely, there would be huge overlap in hardware and software product lines
  • Oracle? Unlikely, they wouldn’t want to get into the lower margin hardware business, and there would be large overlap in software portfolios
  • Microsoft? Unlikely due to corporate culture, although the combined Java + .NET, Solaris + Windows, OSS + Proprietary would be pretty compelling from a customer choice standpoint
  • Accenture? Unlikely, they wouldn’t want to be tied to one vendor’s hardware and software
  • Red Hat? Unlikely, too much overlap in the software product lines
  • HP? Maybe, there would definitely be overlap from a hardware standpoint, but the ability to drive Sun’s software into more shops via the new HP+EDS could be interesting; remember that HP has a history with open source, from Linux to products such as JBoss….

In the end, my money is on Sun remaining independent.  But, rumors of Sun seeking a replacement for Jonathan (as per Ashlee’s article) concern me enough not to put my money on any outcome.

What about you? What do you think lies ahead for Sun?