Southeastern Could Lose $500 Million on IBM-Sun Deal

Sun Microsystems Inc.’s biggest shareholder could face a loss of more than $500 million on its investment if Sun sells to International Business Machines Corp. under terms discussed last week.

Southeastern Asset Management Inc. paid a total of $2.13 billion, or an average of $13.25 a share, for its 22 percent stake in Sun, according to a January regulatory filing. A deal at $9.40 a share would mean a payout of about $1.5 billion for Southeastern.

Southeastern’s situation highlights the dilemma for some Sun investors: whether to push for the takeover and accept some losses, or count on Sun Chief Executive Officer Jonathan Schwartz to turn around the business. Sun’s shares had fallen about 80 percent in the two years leading up to March 18, when reports of IBM’s $7 billion offer emerged.

In addition to the stock holdings, Southeastern’s Longleaf Partners Fund paid $10.1 million for call options that give it the right to purchase 5 million Sun shares at $10 each. Those options, now “underwater,” expire in January 2010.

Southeastern, the investment advisory firm run by Mason Hawkins and Staley Cates, first reported investing in Sun in the third quarter of 2007, when the stock traded at an average price of $20.99 a share. Jason Dunn, a vice president at the Memphis, Tennessee-based firm, declined to comment.

IBM, the world’s largest computer-services company, offered $9.10 or $9.40 a share for Sun, according to differing accounts of the negotiations. That’s almost double the $4.97 Sun’s shares traded at on March 17, the day before the acquisition reports. Sun’s board unanimously rejected the offer last weekend, one person familiar with the matter said.

Board Meeting

Sun’s board was scheduled to meet yesterday to discuss the next steps for the company, according to a person familiar with the matter. Kristi Rawlinson, a spokeswoman for Sun, said the company doesn’t comment on the activities of its shareholders.

Sun, based in Santa Clara, California, rose 2 cents to $6.68 at 4 p.m. New York time in Nasdaq Stock Market trading.

In October, Southeastern announced its switch from being a passive to active investor in Sun. That meant it could have more involvement in the management and governance, and be able to talk with other companies about “transactions of a significant nature,” Southeastern said at the time.

On Dec. 8, Sun, whose stock was trading at $3.83, let Southeastern pick two new independent directors for its board. Hawkins and Cates said in a letter to investors later that month that Sun needed to cut costs after losing revenue from financial-services firms. The fund managers estimated that Sun’s cash amounted to more than half its market value.

Sun’s Losses

Sun posted losses totaling $1.89 billion in the past two quarters after customers cut back purchases of server computers, which account for almost half of Sun’s sales. Sun is now headed for its biggest annual loss in six years.

Some shareholders have already decided to sell their holdings. Relational Investors LLC, once Sun’s third-largest holder, sold its 4.7 percent stake on concern that talks with IBM would break down, Ralph Whitworth, founder of San Diego- based Relational Investors, said this week in an interview.

Whitworth said he may buy Sun’s shares again if they fall further and executives show a “strong commitment to address their cost structure.”

Satyam Cleared by Regulator to Sell Majority Stake; Shares Rise

Satyam Computer Services Ltd. won approval to sell a majority stake in itself as the company at the center of India’s biggest corporate fraud inquiry seeks to restore confidence with investors and clients. The shares rose.

The Securities and Exchange Board of India approved plans for Satyam to sell 51 percent of the company, the Hyderabad-based software-services provider said today. International Business Machines Corp. may be the front-runner to acquire the Indian company, the Business Standard reported yesterday, citing unidentified people familiar with the situation.

Satyam shares rose 20 percent, valuing the company at 28.4 billion rupees ($550 million). Its state-appointed board is expediting the sale to woo back investors after founder and former chairman Ramalinga Raju said in January he inflated assets by more than $1 billion, pushing down the stock by 76 percent.

“This means that the process can now move forward because the more Satyam delays, the greater the risk that customers will desert it,” Apurva Shah, head of research at Mumbai-based Prabhudas Lilladher Pvt., said by telephone.

IBM, the world’s largest computer-services provider, and Larsen & Toubro Ltd., India’s biggest engineering firm, are the leading contenders to buy Satyam, Global Equities Research LLC said in a report on Feb. 24.

IBM Team

Karen Davis, a Shanghai-based spokeswoman at IBM, declined to comment. Larsen hasn’t yet decided whether it will bid for Satyam, Chief Financial Officer Y.M. Deosthalee said today. The Mumbai-based company, which owns 12 percent of Satyam, needs more details on the bidding process, he said, without elaborating.

Armonk, New York-based IBM has begun talks to buy Satyam and brought in a team of lawyers and investment bankers to assess the deal, according to the Business Standard report. IBM increased its India workforce 15-fold to 73,000 in the five years through 2007 in a bid to keep its largest customers from sending work to rivals such as Tata Consultancy Services Ltd. and Infosys Technologies Ltd.

Larsen appointed Nomura Holdings Inc. and Citigroup Inc. as investment bankers to advise it on a potential bid for Satyam, an executive at the engineering company said on March 2. The construction company, which has a software unit L&T Infotech Ltd., may make a bid to acquire control of Satyam, Chairman A.M. Naik said last week.

Spice Corp., with businesses in entertainment and communication technologies according to its Web site, will bid for a 51 percent stake in Satyam, Chairman B. K. Modi said by telephone from London today. Spice, which in January offered 20 billion rupees to buy control of the Indian software provider, will bid for Satyam on a “as is where is” basis, Modi said.

Financial Information

Satyam gained 7.05 rupees to close at 42.15 rupees in Mumbai trading, the most since Jan. 27, while India’s Sensitive Index rose 1.6 percent. The stock has lost 90 percent of its value in the past year, while the benchmark has declined 50 percent.

Bidders, aiming to gain Satyam’s workforce of about 50,000 employees and customers including Cisco Systems Inc., may face the challenge of making offers before the Indian company restates its financials. The buyer will also have to consider potential liabilities from lawsuits filed against Satyam in the U.S.

Satyam will share as much financial and customer information as is legally permissible with bidders, Chairman Kiran Karnik said on Feb. 24. The company had so far lost three “major” clients including State Farm Mutual Automobile Insurance Co., Karnik said at the time.

“People distribution, the client distribution and revenue distribution, all three are important,” in the absence of the restated financials, Tarun Sisodia, a Mumbai-based analyst at Anand Rathi Financial Services Ltd. said before the announcement.

Apple Falls After JPMorgan Cuts Mac, IPhone Estimates

Apple Inc. fell 4 percent on the Nasdaq Stock Market after JPMorgan Chase & Co. cut its estimates for iPhone and Macintosh-computer sales, citing a worsening economic slowdown.

Apple will probably ship 2.19 million Macs in the first three months of this year, down from a previous estimate of 2.39 million, analyst Mark Moskowitz said today in a note. He reduced his forecast for iPhone sales to 3.41 million from 3.82 million.

Mounting job losses, falling house prices and tighter credit are making consumers less likely to purchase electronics, Moskowitz said. Consumers account for 70 percent to 75 percent of Apple’s sales, he said. For the year ending in September, Moskowitz said Apple will earn $4.73 a share, down from his previous prediction of $4.82 a share.

“The next few quarters stand to get bumpy,” Moskowitz said. While consumer spending had held up in previous recessions, the current slowdown is “quite more challenging.”

Apple, based in Cupertino, California, fell $3.54 to $85.30 at 4 p.m. New York time. The stock has declined 29 percent in the past 12 months.

While slowing demand will hurt the company’s revenue, a fall in component prices will reduce costs, enabling Apple to maintain profit margins, Moskowitz said. Competitors such as Dell Inc. are being forced to reinvest declining component prices to maintain their market share, he said.

Price Target

Moskowitz, who has an “overweight” rating on Apple’s shares, cut his price target to $100 from $102.

The U.S. unemployment rate jumped in February to 8.1 percent, the highest level in more than a quarter century, the Labor Department said today in Washington. Employers eliminated 651,000 jobs last month.

Higher jobless rates and corporate spending cuts will weigh on computer sales. Industrywide personal-computer sales may drop 12 percent this year, the most ever, according to researcher Gartner Inc. Research firm IDC predicts a drop of 4.5 percent.

This week, Apple updated its desktop models for consumers, adding more powerful graphics and lowering prices on some machines. The company added a 24-inch (61-centimeter) iMac with twice the memory and storage of the previous generation 20-inch iMac, for the same price. The company also cut the price of the Pro, its most powerful desktop machine, by $300 to $2,499, while more than doubling memory and improving processing speed.

New Features

“The company could partially offset the weakening demand environment for desktop PCs with potential buzz around new features and price points,” Moskowitz said today.

Even as demand slows, Apple’s sales will outperform those at competitors Hewlett-Packard Co. and Dell. Apple’s sales will probably increase 8 percent this fiscal year, according to the average analyst estimate in a Bloomberg survey. Sales at Hewlett-Packard and Dell will drop, analysts project.