IBM and Sun deal struggles with patent and licensing agreements

If IBM is in the due diligence phase of acquisition talks with Sun Microsystems, as news reports suggest, then it has an awful lot to be diligent about.

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If IBM is in the due diligence phase of acquisition talks with Sun Microsystems, as news reports suggest, then it has an awful lot to be diligent about.

IBM and Sun deal struggles with patent and licensing agreements In a merger of this scale, IBM would need to take a hard look not only at Sun's finances but also at any antitrust issues that may arise, as well as potential conflicts related to intellectual property. Those could include compatibility of software licenses and patent agreements with third parties.

"In a deal of this size, there are typically lots of moving parts," said Randall Bowen, an attorney at Grad, Logan and Klewans. "Think of a kaleidoscope, where you turn it and everything comes together to form a nice symmetrical shape. Either that happens and everything falls into place, or else it shatters."

The Wall Street Journal reported earlier this month that IBM was scouring Sun's business contracts for potential conflicts in a prelude to a possible merger, a process it said was expected to take "a number of days." But with no word about a deal from the companies, some observers are starting to wonder if there's a holdup.

"It's impossible to know what it is they're looking at, but the fact that it's taking this long gives one pause to wonder whether there's just such a volume of contracts to look at that it's occupying all this time, or whether they've found some issues that they're busily chasing down," said Steven Frank, a partner with the law firm Goodwin Procter.

To be sure, the due diligence process for a merger this size could take months to complete. But companies often do a cursory review of the business they hope to acquire in order to announce a preliminary merger agreement. They then take several months before the deal is finalised to pore over the details.

If they do plan to merge, Sun and IBM may simply be haggling over price. But if the due diligence is holding them up, the thorny area of intellectual property could create some sticking points, said Frank, who spoke about IT industry mergers in general and not specifically this one.

Both companies have vast product portfolios governed by a mix of open-source and commercial licenses. They also have numerous patent and cross-licensing deals with third parties, including a byzantine agreement that Sun forged with Microsoft in 2004 that ended a lawsuit between them over the Java software technology.

Sun may be licensing a technology from a third party that is vital to one of its products, for example, and such agreements sometimes have clauses stipulating that the license can't be transferred if the licensee is acquired. IBM would need to approach the third party to extend the license, or decide whether to go ahead with the merger even if it has to find another way to build the product.

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