Merger talks between IBM and Sun appear to have broken down, with the two companies unable to agree on the terms of a deal.
The Sun board rejected a formal offer from IBM on Saturday, considering the offer price too low, according to The Wall Street Journal. Sun was also concerned that the offer gave IBM too much leeway to walk away from the deal, according to the newspaper, which cited unnamed sources familiar with the situation.
On 18 March, it was reported that the two companies were in merger talks. The acquisition, valued at about $7 (£4.7) billion, would extend IBM's lead at the top of the server market and give it control of the Sun Solaris, Java and other technologies.
But the companies had reportedly been haggling over a price, and on Saturday Sun rejected the IBM offer of $9.40 per share, according to The New York Times, which also said the talks had fallen apart.
Sun had been seeking assurances that IBM would not walk away from the deal even if it faced tough regulatory hurdles, the Times said, and IBM considered the requirement too onerous.
Sun has sent a notice to IBM terminating its right to exclusive negotiations, and IBM in return has withdrawn its offer to buy Sun, the Journal said.
Such brinkmanship isn't uncommon during late-stage negotiations, the paper noted, and the companies may yet resume talks. But for now, the stance between them was described as "confrontational."
IBM has conducted its due diligence of Sun and found nothing that would prevent it from buying the company, the Journal said.
If the companies fail to make a deal, it is unclear whether another large vendor will step in and bid for Sun. After IBM first expressed its interest in an acquisition, investment bankers for Sun shopped the company around to most large IT vendors over the winter to see if any others were interested, the Journal said, but none were.
That puts Sun in a tough position, said Dan Olds, principal analyst at Gabriel Consulting Group. With no other suitor likely to step forward, Sun will probably have to accept an offer from IBM eventually, even if it means swallowing less favourable terms, he said.
The uncertainty around Sun's future will make companies wary of making big investments in Sun's products, he said, adding to the pressure to make a deal. "Enterprise customers prize vendor stability; they do not buy big ticket items from vendors who are in turmoil," Olds said.
Neither company has confirmed or denied that any discussions are under way.