Where does the Sun-IBM deal failure leave Sun?

So Sun Microsystems turned down IBM’s offer to buy it — even though Big Blue’s $7 billion buy-out bid was twice the valuation of the troubled Silicon Valley stalwart.

We read on Bloomberg that the sticking point was a clause in the contracts of top Sun execs. The news service reports that: “chief executive officer Jonathan Schwartz and chairman Scott McNealy have contracts that mean they would receive three times their annual pay, including salary and bonus, should Sun be acquired.”

IBM reportedly didn’t think too much of that stipulation and would not honour it — even though its acquisition of the fourth-placed server vendor would have boosted its position against number one vendor HP.

We also read that “Sun’s board contended IBM wanted too much control over Sun’s projects and employees before the deal closed”, which is hardly surprising: coughing up $7 billion has a way of concentrating the mind.

And especially when it appears that some super-rich employees wanted to grow even richer than they already are. Top Sun execs get paid in millions of dollars: Bloomberg reports that Schwartz’s salary was $1 million last year and his target bonus was twice that amount. And company founder McNealy was awarded $6.45 million in compensation last year, including $1 million in cash for his “service as an employee of Sun”.

But in this day and age, exactly how much money does one already super-rich individual truly need?

There’s another factor. Even before the recession, Sun consistently failed to show a profit so IBM would be bonkers not to want to manage Sun closely. And Sun looks to be heading for its biggest loss since 2003.

Following its rejection of IBM, Sun’s share price dipped 23 percent, its biggest fall since 2002, according to Bloomberg.

So what are we to learn from this? Chatter among techies in the industry demonstrates tremendous loyalty to Sun and its technology. However, a company selling semi-proprietary kit — yes, I know that Solaris is now open, and that it uses Intel processors and so on, but that’s not where the bulk of its sales are — was always going to struggle now that hardware is commoditised and standardised.

Analysts agree.

“Sun can survive as an independent company, but the longer the recession goes on, the more likely it is the value of the franchise begins to fade,” said one.

“Sun made a horrible mistake. Wall Street analysts probably optimistically expect their revenue to decrease year-over-year for the next several years — they should have just taken that money and ran,” said another.

Is this the beginning of the end for Sun? Industry observers — including this one — have called this before and been wrong. Largely down to the company’s huge cash cache, Sun has continued to trade even as its accounts bleed red.

What’s different this time is that Sun’s top execs seem to have forgotten that we’re in the middle of a recession. It might be because Silicon Valley has its own mental micro-climate. I was there a couple of months back, talking to venture capitalists and heads of startups looking for funding, and the untrammelled optimism was palpable: I almost started sweeping it up off the floor.

But in the real world, there’s near-universal anger and disappointment at the shenanigans of the stupendously well-paid at the heads of companies. Keen to be seen as corporately and financially responsible, IBM is likely to have been sensitive to the appearance of funding what looks like plain greed.

Neither of the two parties has commented on their falling out. But if Sun is to survive, you’d have to hope that hubris doesn’t get in the way of deals with any future suitors.

If there are any.