Story from Business Week
In a move that will reshape how many companies buy high-end hardware and the software running it, Oracle (ORCL) has agreed to buy Sun Microsystems (JAVA) for $9.50 per share, or approximately $7.4 billion. Software giant Oracle is paying slightly more than IBM (IBM) had offered for Sun before negotiations broke off two weeks ago.
The Apr. 20 deal halts a downward spiral for Sun, a tech pioneer badly buffeted by the economic downturn and a shift by corporations away from the company's high-priced computer servers. It also marks a continuation of Oracle's half-decade-long acquisition tear. But buying Sun also carries risks for a company that lacks computer hardware experience.
Still, the potential benefits are clear. Oracle would use the deal to better integrate its own software with Sun's servers and its Solaris operating system, which power data centers in government, the telecommunications industry, and on Wall Street, putting Oracle at the center of the world's most demanding computing applications. Sun also owns the popular Java software programming language and a large data storage business. Oracle's database software is often chosen by corporations to store data for those same applications. Oracle also sells off-the-shelf software packages for corporate accounting, human resources, and supply chain management.During a conference call, Oracle Chief Executive Lawrence Ellison said that thanks to the merger, Oracle will be the only company that can build systems that weave together everything from applications to storage and ensure they work with hardware from the get-go. "The combination of Oracle and Solaris has been successful in the marketplace for a long time," Ellison said. "Completely integrated computing systems, running Oracle and Solaris, should be even more successful and extremely profitable." Sun Chairman and co-founder Scott McNealy called the merger "a truly momentous day for the industry."
Ready-to-Deploy Servers
In early trading, Sun shares surged 2.39, or 36%, to 9.08, while Oracle shares slid 1.17, or 6%, to 17.91. Analyst Maynard J. Um of UBS Investment Research said in a research note that Sun's competitors may gain market share during the integration, and in the longer term "the impact to high-end server market shares will be dependent on Oracle's commitment to the hardware business."
During the conference call, Oracle executives said they plan on keeping Sun's hardware and investing heavily in integrating Oracle software with the higher-end capabilities of the Solaris operating system and Sun's hardware technologies. Oracle President Charles Phillips said strategists from the two companies have already been exploring the possibilities. They may engineer ready-to-deploy servers preloaded with software for target industries, what he called "a complete industry in a box."
While Oracle had long relied on internal research and development for revenue growth, Ellison shifted in 2002 and turned the company into one of the most avaricious acquirers of other companies. Spending more than $30 billion, Oracle snapped up application software rivals including PeopleSoft and Siebel Systems, and core corporate technology providers such as BEA Systems. Reacting to news of the deal, Marc Benioff, a longtime Oracle executive who now runs Salesforce.com (CRM), said, "Oracle's innovation in the industry has become creative acquisitions," adding, "It's easier to write checks than write software."
In addition to Sun's hardware and Solaris, one of the most important elements of the deal is Java. Oracle has used Java as the foundation for its line of Fusion middleware products—which integrate software products from different companies and improve the performance of Web sites. But Oracle's control of Java could present problems for IBM, which has also based much of its software on the programming language. Will Oracle change the Java technology or the license terms in ways that IBM doesn't like? Indeed, IBM is the company most directly affected by the acquisition across the board. The deal creates in essence a smaller version of IBM, complete with hardware, software, storage, and services—though IBM is not in the corporate applications business. IBM spokespeople didn't respond immediately to requests for comment.
In its news release about the Sun deal, Oracle pointed out that when Sun's cash assets are taken into account, the deal is valued at $5.6 billion. The company expects the Sun deal to add at least 15¢to its income on a non-GAAP basis in the first full year after closing, and to contribute $1.5 billion to its non-GAAP operating profit.
