Oracle buys Sun; Now owns Java; Becomes a hardware player

Updated: Oracle said Monday that it will buy Sun Microsystems for $9.50 a share in cash, or about $5.
Written by Larry Dignan, Contributor

Updated: Oracle said Monday that it will buy Sun Microsystems for $9.50 a share in cash, or about $5.6 billion excluding debt, in a deal that plunges Larry Ellison & Co. into the hardware market. The company added that the acquisition of Java "is the most important software Oracle has ever acquired."


Sun Chairman Scott McNealy (left) with Oracle chief Larry Ellison.

With the move- valued at $7.4 billion including Sun's debt - Oracle also becomes a full-fledged hardware player. Oracle has been dabbling with the storage appliance with HP, but the acquisition of Sun puts the company in an entirely different realm. Oracle and Sun have been long-time partners.

On a conference call with analysts, Ellison said that Oracle's acquisitions to date have been market leaders - PeopleSoft, Hyperion and Siebel. With Sun, Oracle said Java and Solaris are the keepers in the deal.

"More Oracle databases run on the Solaris Sparc than any other system," said Ellison, noting Linux was second. "We'll engineer the Oracle database and Solaris operating system together. With Sun we can make all components of the IT stack integrated and work well."

Regarding Java, Ellison said it wanted Sun so it could own the building blocks for its middleware.  Oracle's middleware is built on Java and the applications giant said it will continue to invest in the software.

Ellison said in a statement:

"The acquisition of Sun transforms the IT industry, combining best-in-class enterprise software and mission-critical computing systems. Oracle will be the only company that can engineer an integrated system – applications to disk – where all the pieces fit and work together so customers do not have to do it themselves. Our customers benefit as their systems integration costs go down while system performance, reliability and security go up."

That pitch sort of sounds like Apple's approach on the consumer side. Apple's strategy is to integrate hardware and software to make things easy. Oracle with Sun appears to be the Apple of the enterprise. Indeed, Oracle President Charles Phillips noted that the company is looking to offer everything from apps to the disk.

The data center gets (more) interesting

It's clear that Oracle is targeting the next generation data center---as is the rest of the industry. Here's the list of tech titans looking to remake the data center:

  • IBM;
  • HP;
  • Cisco;
  • Dell;
  • Oracle;
  • And a bevy of other players---Juniper, EMC, VMware---from various angles.

The technical side of this Oracle-Sun deal also is notable. Oracle's stack of IT stuff now includes:

  • Java;
  • Solaris;
  • Enterprise applications ranging from CRM to ERP to business intelligence;
  • The database (Oracle and MySQL);
  • The middleware;
  • The storage hardware;
  • Cloud computing services;
  • And servers.

Oracle's initial game plan is to focus on existing joint customers. That base represents a large data center pie. My hunch is that Ellison saw the possibilities of integrating hardware and software with Oracle's Exadata database machine. Ellison boasted that the Exadata machine has seen strong demand on Oracle's earnings conference call.

In the end, Oracle's acquisition of Sun won't change the company's overall game plan: Offer the customer a lot of product---apps, languages, middleware, databases---lock that enterprise in and collect the dough. 

The art of war

So what does Oracle really want with Sun?

If you subscribe to the art of war approach to the tech sector, Ellison's move to buy Sun makes a lot of sense. To wit:

  • Oracle gets to annoy IBM---and own Java---over a few pennies a share more than Big Blue was willing to pay.
  • Oracle gets to kill MySQL. There's no way Ellison will let that open source database mess with the margins of his database. MySQL at best will wither from neglect. In any case, MySQL is MyToast.
  • Sun has a big installed base. All the better to upsell applications into. 
  • Oracle's database runs on Solaris systems. Oracle fine tunes the systems, charges a premium and ditches the low-margin hardware. 
  • And speaking of hardware. Sun's manufacturing is outsourced so there isn't a lot of baggage---real estate, equipment and labor---to worry about. If Oracle decides to milk then wind down the hardware business it's relatively easy. 

And Sun was relatively cheap compared to Oracle's other acquisitions. The price was above the Hyperion buyout but below PeopleSoft and Siebel. 

Making Sun more efficient

As with Oracle's other acquisitions, Ellison plans to make its target more efficient and squeeze better profits. Oracle said the Sun deal will add at least 15 cents a share in non-GAAP earnings in the first year of the deal closing. That equates to $1.5 billion in Oracle's non-GAAP earnings. Oracle president Safra Catz said the Sun deal will "be more profitable in per share contribution in the first year than we had planned for the acquisitions of BEA, PeopleSoft and Siebel combined."

Catz said Oracle will fund the Sun purchase with a mix of cash and debt. Catz added that Oracle will "run Sun at substantially higher margins."

That statement is pretty heady given that Sun is losing money

For Sun, Oracle provides an exit from troubled negotiations with IBM. Big Blue was interested in Sun but bailed when the two sides couldn't agree on price. Oracle stepped up and was willing to pay the $9.50 a share Sun wanted. Meanwhile, regulatory concerns won't be much of an issue since Oracle hasn't been a hardware player---until now.

In addition, Oracle saves Sun management from what could have been a complete debacle following the IBM takeover talks. The Sun board had been split on the IBM deal. Today, it's all roses. Sun Chairman Scott McNealy said the Oracle-Sun marriage was a "natural evolution" and noted he was "thrilled" about the deal. Sun CEO Jonathan Schwartz added that the Oracle takeover will advance innovation in the marketplace.

It's needless to say, but Sun's board approved the Oracle purchase unanimously. The deal is expected to close in the summer.

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