Is It Safe? IBM Is Better Off Without Sun

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Some analysts questioned IBM's(IBM) competitive position when rival Oracle(ORCL) swooped in and agreed to buy struggling Sun Microsystems (JAVA) after talks between IBM and Sun broke down.

But IBM doesn't need Sun to succeed. In fact, such a deal might have done more harm than good by forcing the technology service provider to dip into its cash reserves to acquire a company that's a mess. These are lean times in the tech industry, and companies with cash are more likely to survive.

IBM had offered to buy Sun for a reported $7 billion to expand its reach in the computer server market and gain access to Sun's popular Java programming language. However, IBM would have been taking on a competitor that's losing cash and headed toward an annual loss.

Sun hasn't been able to generate enough sales to cover its rising operating costs, resulting in many quarters of missed earnings targets. Huge research and development costs and administrative expenses have left Sun with razor-thin margins. The company has lost $1.86 billion in the past two quarters, the first half of its current fiscal year.

Oracle stepped in and agreed to buy the company for $7.4 billion earlier this week. Analysts said the deal could help Oracle gain market share by developing cheap, integrated computer systems.

The threat to IBM is probably exaggerated. Thanks to a robust consulting business, IBM is too diversified to feel any sting from an Oracle-Sun combo. Executives say IBM is on track to boost per-share earnings 3% to $9.20 this year.