Investors active in the IT sector were shocked on the morning of 3/18/09 as they awoke to news that International Business Machines (IBM: ) is working to make its largest acquisition ever when the offered to buy Sun Microsystems (JAVA). The important thing to consider here is whether this aligns with IBM’s overall strategy and reinforces their competitive edge over the likes of Hewlett-Packard (HPQ ), Cisco (CSCO), and Oracle (ORCL). So where do I stand on this acquisition, after all, don’t acquisitions destroy shareholder value? Initially, one could say that this is a terrible move for IBM. Who wants a company that posted a loss per share of -$2.40, and has been unable to shake off unprofitability for years? Well… IBM does, yes this maybe quite crazy, but this is a move that is very bold and opportunistic from CEO Palmisano’s perspective. Pondering the reasons why this makes sense from IBM’s perspective, I was able to draw three solid drivers for this buyout. Keep in mind that the pair have declined to comment on the details of  this possible tie up and the only information is coming from a source close to these parties. For those of you skeptical of this acquisition, I am taking sides with IBM as a shareholder who understands the consequences of acquisitions.

Retaliation to Cisco

Cisco, the leader in telecommunications technology and equipment, announced its entrance into the server market with its own line of blade units. This is direct competition to not only IBM, but also HP who are users of the switches, bridges, and other communication components that Cisco provides for server and data center configuration. IBM has slowly divested slower growth hardware segments such as Lenovo, but I think Sun brings a solid server and workstation line that runs similar open source operating systems which IBM supports. Cisco could pose a serious threat if their servers are priced at a discount with cutting edge communication hardware that can trump those offered by IBM or HP. The reason why Cisco is still trumped in the battle is due to the fact that they have to still buy software to apply on these servers which can come from the likes of IBM, HP, Oracle, or Microsoft (MSFT) amongst others.