Sun and IBM in talks over $6.5bn merger

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Shares in Sun Microsystems, the pioneering IT company, surged on news that rival IBM has suggested a takeover at twice the previous price.

IBM is fighting to stay on top of the market for high-end computer servers, in the face of a consolidating industry and toughter competition from Hewlett-Packard and Cisco Systems, among others.

The $6.5bn deal, which sources said was on track to be announced later this week if talks do not hit a snag, would be the biggest in IBM's history. The company is currently flush with cash, having $13bn on its balance sheet.

Sun, named after the Stanford University Network built by four students there for an IT project, found its servers highly popular during the boom a decade ago, but has never fully recovered its previous status. Analysts said there could be substantial cost-savings generated by combining its suite of corporate hardware, software and services together with IBM's.

By lunchtime, Sun shares were trading up 80 per cent at $8.95 on reports that IBM has pitched its bid at between $10 and $11. Jyske Bank analyst Robert Jakobsen said: "The market hasn't been kind to Sun Microsystems in the last 12 months. So it's not an expensive acquisition in my view."