Breaking news from The Wall Street Journal points to progress in the IBM/Sun deal: the share price has dropped a dollar or two to a range of $9 – $10 per share. In addition, our pal Timothy Prickett Morgan at The Register is reporting on rumors (just rumors, as he correctly emphasizes) that the deal may be announced as soon as tomorrow.

In any negotiation, you try not to give up something without getting something else. The guys driving the deal on the Sun side (Southeastern Asset Management and KKR) gave up purchase price in order to get a commitment from IBM that they’ll pursue the deal even in the face of intense regulatory scrutiny… or in the face of regulatory requirements that might cause IBM to disgorge part of the Sun purchase. As stated in the WSJ article, Sun’s negotiators want to limit IBM’s ability to exit a potential deal.

And there well may be some considerable scrutiny focused on this deal. It all depends on how the regulators slice and dice the various markets in which Sun and IBM compete. The most obvious problem area is in tape storage, where a combined IBM/Sun (via StorageTek) would control nearly half of all tape storage revenue and the standards for high-end tape drives.

In the server markets, it’s a bit cloudier; just how cloudy depends on just how you define a “computer”. On the Unix system front, the combined companies would earn 65% of all Unix market revenue, and assumedly at least that much in terms of units. For the server market overall, IBM/Sun would account for 42% of all revenue. But, again, what’s a business computer? Do mainframes really compete straight up with Unix and x86 servers? Mainframes are still a significant portion of IBM server revenue, but they aren’t exactly substitutes for Unix and x86 systems. The vast majority of customers don’t look at a server purchase and say, “Hey, should I buy a Dell 2-socket Intel box for our new web server application, or perhaps go with a mainframe?”

If IBM were forced to disgorge some of Sun’s installed base, we’re not sure exactly how that could be done. It would certainly devalue the entire deal; we believe much of the benefit to IBM is in “owning” those Sun footprints in data centers around the world. Perhaps, as some speculate, IBM could cede ownership of Sun SPARC architecture to Fujitsu, but we’re not sure if that would solve regulatory concerns. Another consideration for this deal is the economic context in which it’s taking place. If IBM were to back out, it isn’t assured – or even likely – that another suitor would come in as a white knight. We believe that Sun has been shopped up and down the valley already, and that all the most likely suspects have already passed.

Regulators need to take into account that if this deal falls apart, there’s a high likelihood that Sun could fall apart as well. Their viability as an ongoing business would be a real concern for present and potential customers – the kiss of death in the high tech market for enterprise products. A technology icon biting the dust would add to the global financial downward spiral; how large a factor this will be in regulators’ minds remains to be seen.