IBM Acquisition of Sun Microsystems - Trading JAVA

With the doubling of the JAVA stock price on March 18, 2009 based on a Wall Street Journal report that IBM is bidding to buy Sun Microsystems, and with the Ctabs sell action commentary on March 21, one open question is “Should the stock be shorted?”. Here is where other factors have to be considered beyond technical analysis. With speculation that other companies such as Hewlett-Packard (HPQ) and Cisco Systems (CSCO), among others, may want to buy Sun Microsystems, a bidding war can emerge. For this reason, it is probably risky to short the stock at this point, although selling the long position holding is the prudent thing to do.

I continue to be amused by corporate acquisitions and the price paid for such actions. I was involved in such a scenario in 2001 (at the onset of the tech/telecommunications industry meltdown) where the company I was working for ballooned to 95,000 employees largely on the contribution of various corporate acquisitions leading up to year 2001. Today, that company has less than 32,000 employees and has filed for bankruptcy protection.

The previous paragraph was not meant to suggest a similar fate for IBM but was simply old memories coming to the fore as this Sun Microsystems acquisition is being reported. The price is high at $8B. There will be corporate culture clashes and integration issues, as well as clear conflicts in technology in terms of Intel and Advanced Micro Devices microprocessors used in IBM server products versus the Sun Microsystems SPARC architecture microprocessors.

And what is the latest craze with Sun Microsystems anyway? Well, Sun’s legacy is in engineering workstations and server products. But in 2007, Sun changed its stock symbol from SUNW to JAVA to clearly re-orient the company strength and leadership in the JAVA programming language. As significant as the JAVA technology is to the Web computing industry, one must continue to question how they intend to make money from this. As an investor/trader, that is the most important question to answer.

It will be very interesting indeed to see how this unfolds if IBM does end up acquiring Sun Microsystems. Will IBM then customize JAVA for its own internal purposes, thereby creating a potential issue with the open JAVA standard? How does IBM intend to recover the $8B spent predominantly on the acquisition of the JAVA technology which rightly belongs in the domain of open standards.

As an investor/trader of JAVA now and IBM now and in the future, the company fundamentals are extremely important to analyze beyond the technical analysis indicators. This is the time to avoid being over-focused on technical analysis alone.

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