For IBM, buying Sun Microsystems Inc makes a lot of good business sense: It removes a competitor, strengthens IBM against rival Hewlett-Packard and picks up on the cheap the intellectual property of one of Silicon Valley's most respected companies.

While it may be tough to persuade regulators on both sides of the Atlantic to approve the deal, and melding easy-going Sun with more conservative Big Blue will be a challenge, many analysts believe IBM has a good chance of doing just that.

This is a very difficult environment in which to gain market share. That's probably an easier way than putting more sales people on the ground, said Pat Becker Jr, chief investment officer for Becker Capital, which manages about $1.6 billion and holds a small number of shares in IBM.

Kaufman Brothers analyst Shaw Wu said IBM (IBM.N: Quote, Profile, Research, Stock Buzz) and HP (HPQ.N: Quote, Profile, Research, Stock Buzz) have been trying to woo customers away from Sun (JAVA.O: Quote, Profile, Research, Stock Buzz) for years.

Sun's installed base is pretty good. While it is shrinking, it is fairly loyal. And what better way to get to that customer base than just buying the company, he said.

And then there's International Business Machines Corp's track record. It has spent some $25 billion since 2003 to buy 80 companies, with only a few hiccups along the way.

IBM offered to purchase Sun -- whose market value tops $6 billion -- for $9.55 per share after a thorough vetting, a person familiar with the situation said on Thursday. That source, who is not authorized to discuss the matter publicly, said a final agreement could be announced within days. Both companies have declined comment.

The deal would add what was one of the world's hottest brands during the dot.com technology boom to IBM's arsenal of computer services, hardware and software products.

While Sun is expected to post a loss this year as it undertakes a massive restructuring, laying off thousands of workers, buying the company would give a boost to IBM's lagging sales.

Analysts expect the recession and currency headwinds to cause revenue to slip 6 percent this year to $98 billion, according to Reuters Estimates. Sun's sales are seen falling 11 percent to $12 billion in its current fiscal year.

But IBM is well positioned to slash Sun's costs and boost the profitability of its businesses, analysts and investors said.

When IBM acquires a company, it slashes overhead and dramatically increases distribution using its own sales force, one of the world's largest.

Buying Sun would give IBM a clear lead at the high-end of the $45 billion overall server market that it fights over with Hewlett-Packard.

The deal would also broaden IBM's software portfolio and add storage products that vie with EMC Corp (EMC.N: Quote, Profile, Research, Stock Buzz) and Network Appliance Inc (NTAP.O: Quote, Profile, Research, Stock Buzz). It would also provide an edge over Cisco Systems Inc (CSCO.O: Quote, Profile, Research, Stock Buzz), which some see as IBM's biggest rival in the long term.

Kim Caughey, an analyst with Fort Pitt Capital, which holds IBM shares, expects IBM to generate efficiencies through moving production of Sun's high-end computer chips to IBM's own plants and dropping Sun products with low margins.

Sun is best known for its high-end Unix servers favored by big financial services firms, telecommunications carriers and government agencies.

IBM led that $17 billion market last year with a 37.2 percent share of sales, followed by Sun with 28.1 percent and HP with 26.5 percent.

Pat Becker Jr of Becker Capital said Sun's Unix server sales may be poised to pick up as many customers are using machines purchased in the 1990s that are wearing out.

When they do, IBM may be able to simultaneously sell them products in its broad portfolio, including storage equipment, software and services.

While neither company has publicly commented on the talks, a person familiar with the negotiations told Reuters IBM reduced its original offer for Sun, from somewhere between $10 and $11 to $9.55 after completing a thorough due diligence.

Thomas Lys, a professor of accounting at the Kellogg School of Management, said that may be because IBM discovered some weaknesses during its review.

Sun is struggling. They are getting a company that needs restructuring, Lys said. The good news is that Sun's problems are known.

Analysts expect IBM would likely cut thousands more jobs beyond what Sun has already announced. But they added it would be important for IBM to retain the most talented workers and a culture that has fostered innovation.

I think it's important that they do not break the Sun culture. If all they do is buy the Sun customer base and beat these guys into submission, then they lose half of what they've paid for, said Howard Anderson, a professor with MIT's Entrepreneurship Center.

(Additional reporting by Ritsuko Ando in New York; Editing by Andre Grenon)

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