The New York Times draws its information from three people close to the matter, who wish to remain anonymous because information about the negotiations is confidential. IBM had a team of 100 lawyers looking over the negotiations, and after their research into all the possible issues that could arise, IBM lowered its bid from USD 9.55 per share to USD 9.40. Sun's board did not reject this offer, but did ask for certain guarantees that IBM thought were "onerous".
One of the reasons IBM backed out has to do with the change in control contracts with Sun people higher up in the chain (they're never about normal employees, are they?). IBM found that the payments to high Sun people were higher and more extensive than it had anticipated.
Now that the deal is off (assuming the NYT's sources are correct), Sun is free to enter negotiations with other parties, such as Hewlett-Packard and Cisco.