Updated from 11:11 a.m. EDTCisco ( CSCO) heated up the server market this week, ice cracked, IBM ( IBM) warmed to Sun ( JAVA) -- and suddenly there's talk of a thaw in tech mergers. IBM's interest in a $6.5 billion deal for data networking specialist Sun Micro, as reported Wednesday by The Wall Street Journal, suggests that long-dormant acquisition activity is springing to life. Cash-hoarding tech shops have been slogging through the recession by price-fighting the competition, yet they're still powerless to revive stagnant growth. These companies may now be scanning a field of possible takeover bargains as stock values start to bounce off multiyear lows. "There will be more M&A, and it's largely a function of market and valuations," says Matt Robinson, an analyst with Wedbush Morgan Securities. Robinson predicted in January that Cisco would crash Hewlett-Packard's ( HPQ) and IBM's server party, ending the peaceful segmentation of the IT sector. Cisco has been pursuing a partnership route, especially with its new server move, enlisting Intel ( INTC), Microsoft ( MSFT) and virtualization shop VMware ( VMW) executives to star in its media show Monday. But other big players like H-P and Dell ( DELL) have yet to chose a path. Possible acquisition targets that could help bolster vulnerable positions will probably include the usual names like data storage firm EMC ( EMC), and networking gearmakers like Brocade ( BRCD) and Juniper ( JNPR). "These companies are struggling to grow organically," says Collins Stewart analyst Ashok. "They are weighing whether consolidation makes sense." With Cisco crossing product lines, these companies now need to defend turf and fill in some holes with strategic buys. And, says Robinson, "they want to get it done while they can get a good valuation."
IBM's willingness to pay twice Sun's market value seems overly rich and a bit desperate, say some analysts. "This is a complete about face for IBM," says Kumar. "The message it sends to the street is that IBM's business is not doing well." Sun's business isn't exactly thriving either. Last year, Sun swung to a massive $1.8 billion loss on $3.7 billion in sales. The Java software developer is currently in its ninth round of job cuts and let about 7,500 workers go last year alone, as demand for its servers and Solaris software dwindles. If the deal goes through, Sun's losses will dilute IBM's earnings by about 5 cents per share according to one analyst. That is a steep price to pay, but desperation, as well as valuation has always been a big motivating force behind takeovers as the competition heats up.