TSC Ratings provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach to investing aims to reduce risk while seeking solid outperformance on a total return basis.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.
The acquisition is more likely to hurt companies such as Cisco Systems ( CSCO), Hewlett-Packard ( HPQ) and Dell ( DELL), which deal heavily in the server business. IBM shares have risen 21% this year, outperforming the 4.9% advance of the S&P 500 index and the 13% gain of S&P's information technology index. Still, the stock is cheap compared with those of rivals, with price-to-earnings and price-to-sales ratios that are lower than its peers. IBM investors have enjoyed a 59% return on equity, which is 47 percentage points higher than the average for its peer group. The company easily funds its 2% dividend yield through earnings, allowing it to devote 75% of its profits to expanding its businesses. TheStreet.com Ratings has rated IBM "buy" with a grade of B, putting it in a group that includes only 7.2% of the stocks we track. During a time when strategy and managerial choices could mean the difference between success and failure, the distractions of a Sun integration would have likely outweighed any potential benefits.