The talks were first reported in The Wall Street Journal. Neither Sun nor IBM were immediately available for comment, but analysts are bullish on the deal -- and so is Wall Street. Sun's stock skyrocketed on rumors of an IBM purchase, rising 80 percent in Wednesday trading. IBM's stock dipped one percent.

Although analysts have speculated about the possibilities of IBM acquiring Sun for years, this is the first time the companies appear to be in serious negotiations. IBM and Sun compete in the server and software markets, but each face a larger competitor in Cisco with its newly unveiled Unified Computing System. IBM may also be feeling pressure from Hewlett-Packard's $13.25 billion acquisition of EDS last year.

Sun's Survival Strategy

The purchase of Sun would be a win for IBM, according to Theresa Lanowitz, a former Gartner research director and founder of Voke Research. "Sun has been in a holding pattern since the dot-com implosion," she said. "And while Sun positioned themselves as 'the dot in the dot com,' that was the last innovation we have seen come from Sun."

While it once had very competitive hardware, Lanowitz said Sun had no idea how to produce and implement effective software products. "Sun works on the assumption that all software must lead to Sun server sales -- definitely a flawed idea that was proven wrong numerous times," she said. "Sun also was never able to quite grasp the idea of high volume and low-margin sales. Sun continued on in its technology efforts like it was 1988."

Lanowitz said IBM has clearly demonstrated that it's more than capable of being a hardware company, running an effective and profitable professional services business, managing a growing and diverse software portfolio, and delighting its customer base. It's not clear whether IBM is after Sun's customer base or whether it would allow Sun to operate as a division under the Big Blue flag.

From Foes to Friends

IBM and Sun have battled over the Java programming language in the past, but have complimentary goals with open-source and cloud-computing initiatives. Together, IBM and Sun would have a stronger presence in the $85 billion data-center market.

Rumors surfaced Wednesday that Dell may be looking to acquire Sun, and IBM leaked news of its intention to drive up the cost. Dell has more than $9 billion in cash. Hewlett-Packard could also buy Sun with its $11 billion in cash.

With stock prices falling, analysts expect to see more consolidation in the high-tech industry, with HP , Dell and Cisco in line to fill in gaps or snap up competitors. But IBM may be best positioned to purchase Sun in the near term based on the complementary technologies of both companies.

"IBM has also managed many acquisitions and always seems to find something in an acquisition worthy of continuing on with the IBM brand," Lanowitz added. "The potential of a Sun acquisition by IBM makes sense. IBM is a world-class business organization and will be able to make business sense out of Sun's academic assets."