International Business Machines Corp is in talks with Sun Microsystems Inc to take over the ailing computer major, according to a widely publicised report in the Wall Street Journal. Although neither IBM nor Sun was willing to comment, the report said the deal would be worth at least $6.5 billion.

The Frankfurt-listed shares of Sun Microsystems surged by as much as 61 per cent in the wake of the report. The offer would value Sun's stock at more than double the closing price of $4.97 in the US yesterday, WSJ reported, but added that an agreement may not be reached, the newspaper said. Officials at Sun and IBM declined to comment.

Buying Sun would help IBM widen its lead over Hewlett- Packard Co in the $53.1 billion market for computer servers. Sun is projected to post its third consecutive quarterly loss as chief executive officer Jonathan Schwartz seeks to weather the global recession by slashing as many as 6,000 jobs and offering lower-priced products.

Paying over $6.5 billion for Sun would make it IBM's biggest acquisition ever. The company bought Cognos Inc for $4.9 billion last year to compete with Oracle Corp and SAP AG in providing software that tracks corporate performance.

Companies in the technology industry have announced $3.6 billion of acquisitions so far this year, less than a fifth of the value of takeovers they announced in the same period a year earlier, according to data compiled by Bloomberg. The acquisition would be the biggest in the industry since Hewlett-Packard agreed to buy Electronic Data Systems Corp for $13 billion in May last year.

In August last year, San Jose Mercury News had  reported that given Sun's depressing forecast and declining share price, Sun Microsystems was ripe for a takeover by technology majors like IBM, HP, Dell or Fujitsu. (See: Sun Microsystems a takeover target: report).

Such a takeover could involve billions of dollars and spell the end for one of the most respected companies in the Silicon Valley, the report had said. An acquirer would find definite value in taking over Sun, which has a reputation for pioneering workstations, servers and software and owns substantial intellectual property.

Hardest hit by downturn
Founded in 1982, Sun is the seventh-largest company in Silicon Valley with reported annual sales of $13.9 billion.

Sun's profits slid to $88 million in second quarter 2008 from $329 million for the same quarter last year on revenues that declined to $3.78 billion from $3.84 billion last year, leading to takeover speculations.

A Sun executive told the newspaper that the slowdown in the US economy had impacted the company more than its rivals as it sells big, expensive servers to corporate customers in the US financial and telecommunications sectors, which have been hit hard by the downturn.

Sun has projected a low single-digit in revenue growth for the next full fiscal year but does not expect any growth in US sales for the next six months.

In January 2007, an investment fund owned by Kohlberg Kravis Roberts & Co bought $700 million of Sun's convertible notes. James H Greene Jr., a KKR general partner, has been on Sun's board since last year. Sun founder and former chief executive Scott McNealy is chairman of the company, and its single biggest investor, with about 14.1 million shares as of August last year.

In recent months, Sun Microsystems has contacted a number of technology companies with the aim of being acquired, people familiar with the matter said, according to the WSJ report. HP declined the offer, the newspaper said.

According to IT market research firm Gartner's report on server sales, even as IBM, Dell and HP had revenue increases for the second quarter, Sun experienced revenue declines.

Buying Sun Microsystems would boost IBM's share of global server sales by 9.6 percentage points to 43 per cent, widening the lead over Hewlett-Packard's 30 per cent, according to fourth-quarter estimates at Credit Suisse Group AG on Tuesday.

Dell Inc ranked third in the industry with a share of 10.7 per cent, followed by Sun and Fujitsu Ltd, according to the report. Global sales of computer servers will probably fall 17 per cent to $44.2 billion this year as the global recession drives down demand and prices.